For individuals or businesses lacking the funds, assets or ability to pay off their IRS tax debt right away or in the near future, the Offer in Compromise program is a lifesaver. It offers qualifying taxpayers a second chance to satisfy their tax obligations. Such a rare opportunity for a fresh start makes this option one of the optimal tax debt resolution tools available to delinquent taxpayers.
An offer in compromise is an agreement between the IRS and taxpayers allowing the latter, under certain circumstances, to pay less than the full amount owed and to have the remaining balance wiped out. To be accepted, a taxpayer's offer must satisfy one of three grounds:
- There must be doubt as to collectability of the tax debt;
- There must be doubt as to liability; or
- Collecting the debt would be unfair in view of the circumstances and would not promote effective tax administration.
Taxpayers are required to submit the offer-in-compromise Form 656-L where there is doubt as to liability, whereas those basing their request on either doubt as to collectability or effective tax administration must file Form 656. They must also complete Form 433-A titled "Collection Information Statement".
To be eligible for an offer in compromise, taxpayers must meet the following requirements:
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They must have paid their most recent tax bill;
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They must not be parties in ongoing bankruptcy proceedings
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If in business, they must demonstrate that they have filed and paid all employment taxes for the last two quarters and be current for the time period during which they submitted their offer in compromise.
Once the IRS determines that the offer passes the processability tests, it assesses the taxpayer's financial status to ascertain the sum that he or she is capable of paying. This monetary sum is known as the reasonable collection potential (RCP). The Service usually accepts an offer in compromise if the pledged sum is equal to the taxpayer's reasonable collection potential. However, it may approve an offer of lesser amount where acceptance would further effective tax administration or where the taxpayer is experiencing economic hardship. Upon acceptance of their offer in compromise, taxpayers will be required to file all tax returns and pay their taxes on time for five years from the date of the settlement. Once an offer in compromise has been accepted, and the taxpayer has fully complied with the terms of the agreement, the IRS extinguishes his or her previous tax debt and releases all tax liens.
Taxpayers may choose from among three different payment options:
1. Lump sum cash
Individuals filing lump sum offers are required to enclose a payment constituting 20% of the offered amount with their application. A lump sum cash offer must be paid within two years.
2. Short term deferred offer
Taxpayers must submit a short term period payment within two years from the date the Service receives their offer.
3. Deferred periodic payment
A deferred payment offer must be submitted in full in 25 or more months and during the statutory limitations' time frame for collection.
To fulfill the processability criteria, taxpayers who choose either a short term deferred offer or a deferred periodic offer must pay the full amount of their first installment payment.
Taxpayers contemplating an offer in compromise would be well-advised to retain the services of a tax service, preferably an experienced enrolled agent or tax debt lawyer. Being familiar with the nuts and bolts of the offer in compromise program, they will be in a solid position to represent taxpayers' interests and negotiate a settlement with the IRS.