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What is an offer in compromise?

On Behalf of | Oct 18, 2022 | Tax Debt |

Taxpayers in Washington and around the country who owe money to the Internal Revenue Service are sometimes able to settle their outstanding tax bills for less than the total amount due. To receive this form of tax relief, taxpayers must submit what is known as an offer in compromise to the IRS. When the IRS receives these requests, they are granted or rejected based on the taxpayer’s assets, income and expenses. Offers in compromise are accepted when the IRS determines that paying the full amount of taxes owed would create an unreasonable financial hardship for the taxpayer.

The IRS wants all of the money it can collect

Federal tax laws give the IRS a great deal of power, and the agency uses these powers to collect as much as it can from individuals and organizations that have unpaid taxes. When the IRS accepts an offer in compromise, it does so because it considers the amount being offered the most it can possibly recover from the taxpayer. Before an offer in compromise is processed by the IRS, individual taxpayers must submit a Form 433-A and pay a nonrefundable $205 fee.

Offer in compromise payments

When the IRS accepts an offer in compromise, it offers taxpayers a couple of ways to pay their unpaid taxes. Taxpayers can either settle the outstanding balance with a single lump-sum payment, or they can just pay 20% of what they owe. If they choose to pay less than the full amount, they are given up to five months to pay the remaining balance. Taxpayers who meet IRS low-income guidelines do not have to pay the application fee and do not have to make payments while their offers are being reviewed.

Preparation is important

Taxpayers who make offers in compromise should think carefully before they submit any paperwork to the IRS. Attempts to conceal assets or income will likely result in offers being rejected, and submitting misleading information could lead to further IRS scrutiny. Offers in compromise are available to help taxpayers in unmanageable financial situations, but they are not a solution for those who can afford to pay their taxes but do not want to.