Your Basic Guide to Using an Offer in Compromise to Settle a Tax Bill

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If you owe more than $52,000 in federal taxes you may not be able to renew your passport.

If you owe the IRS and are struggling to pay your tax bill, your life could be affected in ways you never imaged.

If you are sick of dealing with the IRS and carrying tax debt, you may have a way out. Did you know you can negotiate your tax bill with the IRS?

Keep reading for more information on how to file an Offer in Compromise and reduce your tax debt today.

What is an Offer in Compromise?

An Offer in Compromise is an offer made by a taxpayer to the IRS to settle their tax debt for less than what they owe. This is a program offered by the government to help taxpayers get out of debt and get a fresh start with the IRS.

Usually, an Offer in Compromise will allow a taxpayer to receive a significant discount on their owed taxes for resolving their account.

Taxpayers do not have any sort of legal right to make an offer, it is purely up to the government on whether or not to accept the offer. In general, the IRS is required to give offers fair consideration.

The IRS accepts almost half of all Offers in Compromise it receives.

Qualification

Unfortunately, not everyone will qualify to make an Offer in Compromise. If this was the case, everyone would try to get a tax bill reduction.

In order to qualify, the IRS must see that you meet one of two conditions.

1. Doubt as to collectibility- There must be some doubt by the IRS as to whether they will be able to collect what they are owed from you either now or in the future.

2. Exceptional circumstances- You must demonstrate that payment of your tax bill in full would cause you economic hardship or would be unfair for some reason.

It is also possible, though rare, to qualify to make an Offer in Compromise based on doubt as to whether your tax liability was correctly assessed.

The IRS website has an online tool to help you decide whether you are eligible to make an Offer in Compromise.

How Does it Work?

Actually submitting your Offer in Compromise is a complicated process and one best left to your tax attorney.

There are many complicated tax forms to fill out that you likely will not understand if this is your first time making an Offer in Compromise.

If you are up for the challenge on your own, you must first file IRS Form 656, Offer in Compromise. The cost to file this form is $186, but this might be waived if your monthly income is below the poverty level. You will need an additional form if you are filling a poverty exemption. 

Filling out an Offer in Compromise will require providing details on your financial information to the IRS.

If you are married, depending on what state you live in, you may need to provide information on your spouse. This may be the case even if you are the only one who owes the IRS.

You will need to be extremely careful when filling out this form. You want to be sure you are entirely accurate. As you are asking the IRS to forget about a significant amount of debt that you owe them, they will be paying close attention to the information you provide. 

Is There a Catch?

There are a couple of things to consider before filing an Offer in Compromise. First, the process is a lot of work. Simply filling out the forms described above will not grant you a compromise.

You will be required to provide substantial documentation. Some examples of the kind of documentation that the IRS will ask for include bank records, vehicle registrations and records, bills, receipts, and pay stubs. It can be expensive and time-consuming to locate and manage these records and then send them to the IRS. 

The other thing to consider about filing an Offer in Compromise is that you will be giving the IRS everything they need to come after you for the full billed amount if they do not accept your offer.

You will have disclosed all sorts of important information about your finances and your assets. It is important to only submit an Offer in Compromise that you are certain will be accepted.

You will continue to accrue interest on your tax debt during this process as well. If you don’t make a deal, your tax bill has increased. 

Making an Offer

In order to determine how much to offer, you will consult Form 433. You will determine what is considered to be your reasonable collection potential based on the financial information you disclose using this form. You are essentially looking to offer the “net realizable value” of your assets and your excess monthly income after expenses. You will then calculate a payment period of either five months or two years.

Appealing a Rejection

If your offer is rejected, the IRS must give you a written explanation of the reason for rejection.

If you offer is rejected for being too low, the IRS will tell you what amount is required. You can increase your offer to this amount by sending a letter or contacting the person who signed the rejection.

If your financial situation has not changed and your new offer is not significantly different than your first offer, you do not need to file a new form. You can also formally appeal the rejection. 

Consult an Attorney

If you are interested in making an Offer in Compromise in an effort to reduce your tax debt, you should consult a tax attorney.

An attorney will make sure you file the proper forms and provide all of the information necessary for the process to go as smoothly as possible. Dealing with the IRS is never fun, but having a tax attorney on your side will make the process much more bearable. 

Contact us today to schedule a free consultation with a tax attorney. 

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