Offer in Compromise: How to Settle Your Tax Debt
The IRS might accept less than what you owe
Almost two-thirds of Americans—about 65 percent—either save none of their incomes or save just a small amount, according to a 2018 survey by Bankrate.com. This can be almost catastrophic if they complete their tax returns only to realize that they owe a sizeable tax debt to the Internal Revenue Service.
The key word here is "almost." The IRS is willing to work with taxpayers who come up short at tax time.
Unfortunately, the program was misunderstood by many consumers and it was abused by some unscrupulous tax preparers as well. The IRS made some changes effective July 16, 2006 to address these issues.
Some adjustments were made to the OIC process under the terms of the Tax Increase Prevention and Reconciliation Act. All offer in compromise taxpayers must now begin making payments on their proposed settlement amounts at the time they submit their required forms and documentation for application.
There are three payment options for an offer in compromise: a lump sum payment, monthly payments spread out over up to 24 months, or monthly payments over the remaining statute of limitations of the tax debt.
Applicants must submit a 20-percent down payment if they choose a lump sum payment plan, or they must immediately begin making monthly payments if they choose one of the two monthly payment options.
As for those abusive tax preparers who were submitting offers that didn't meet eligibility requirements, the IRS has made it a little easier for you to avoid them. You can prepare an offer yourself. The instructions that come with the forms are much easier to read and to follow.
Get the Instructions and Forms
You can obtain the all the offer in compromise forms and instructions in a booklet on the IRS website. It's called "Form 656-B." You can also call the IRS at 1-800-829-3676 and ask them to mail you the booklet or you can pick it up from your local IRS taxpayer assistance center.
Other Tax Debt Strategies
The IRS offers at least four other options for digging your way out from under tax debt. You can enter into an installment agreement, a monthly payment plan for paying off the IRS.
A short-term installment plan gives you an additional 120 days to come up with the money if you think you can erase your debt in that period of time. Otherwise, if it will take you longer, you can ask to enter into a long-term plan. Certain restrictions apply.
"Not currently collectible" is a program where the IRS voluntarily agrees not to collect on the tax debt for a year or so, giving you some time to get back on your financial feet.
The partial payment installment agreement is a fairly new debt management program where you're given a long term payment plan to pay off the IRS at a reduced dollar amount.
You can also file for bankruptcy but very strict rules apply as to which tax debts are dischargeable and which cannot be "erased" in a Chapter 7 or Chapter 13 bankruptcy proceeding.
Helpful Tips on Offers in Compromise
There's no guarantee that the IRS will accept your offer in compromise. The IRS bases its decision on several factors.
It might approve your offer if there's some issue as to whether you legitimately owe the tax. This falls under the umbrella of "doubt as to liability."
The IRS might also approve your application if, based on your submitted paperwork that documents your current financial situation, it appears highly unlikely that you'll ever be able to pay off the tax debt in its entirety. When you tally up your income and the value of your assets, it comes out to less than what you owe. This is referred to as "doubt as to collectability."
Finally, you might be approved if "payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances," according to the IRS. This would apply even if there's no doubt or dispute that you owe the tax and if your income and assets exceed your debt.
You will not be approved, however, if you qualify for one of the installment agreements. If so, the IRS figures that you have ample resources to pay off your tax debt in full over time.
You might find this information helpful in successfully preparing an IRS offer in compromise:
- Offer in Compromise Essentials
- Hiring a Tax Professional to Prepare an Offer in Compromise
- Offer in Compromise Forms & Documentation
- Preparing IRS Form 433-A
- Calculating Your Settlement Amount - Reasonable Collection Potential
- Preparing IRS Form 656
- Offer in Compromise Checklist
- Payment Options for an Offer in Compromise
- Protecting Your Tax Refunds during an Offer in Compromise