The burden of tax debt can be heavy. That’s why so many people look for back tax solutions that will allow them to pay over time or settle for less than the total amount owed. Fortunately, the IRS offers a number of tax debt resolution options for those who qualify. An offer in compromise is just such an option – allowing certain people to settle their tax debt and resolve an IRS problem for less than the full amount owed.
For those who legitimately cannot pay back their full back taxes due to financial hardship or other major life events that make it impossible to meet your obligation, an offer in compromise is a way to work with the IRS toward a resolution.
How an Offer in Compromise Works
Tax relief from an offer in compromise will depend on a number of factors. From the IRS’s perspective, some payment is better than none, so an accepted offer is usually one they believe represents the most you can be expected to pay.
To start, you should check your eligibility. There are several factors involved here, including:
You cannot have an open bankruptcy proceeding
You must be current with all filing and payment requirements
The IRS offers a pre-qualification tool to help you determine if you are eligible for their program. The tool will help assess your total current assets and your liability. By reviewing these and several other factors, you can determine just how much relief you are eligible for in your current financial situation.
After determining eligibility, you must submit your offer. There is a specific form for both individuals and businesses (433-A OIC and 433-B OIC respectively) for this process. Additionally, individual and business tax debt must be submitted on the Form 656 and there is an application fee for each of these forms submitted. All of this information is provided in a packet you can get from the IRS or a tax professional.
How Payment of an Offer in Compromise Works
Because you are making an offer for IRS debt relief, you must also determine the payment option that you can realistically manage. There are two options. You can either submit a lump sum payment of at least 20% of the total offer with your application followed by 5 or fewer payments after acceptance of the offer, or you can make periodic payments. The latter is for those who are paying a tax debt in monthly installments. You would continue to pay these monthly installments until you get a response on your offer, and then continue until the new balance is paid off.
There is a special consideration for those who are considered “Low Income” – if you meet these requirements the application fee and initial payment may be waived. Again, it’s important to be sure that you qualify for this – another reason that working with a tax professional is often recommended for an offer in compromise.
How Long Do You Have to Wait
After submitting your offer in compromise for tax relief, you’ll have to wait some amount of time for a reply. During that time, if you keep paying toward your tax liability, any of those payments and fees will be applied to your total debt. The fees for applications are also applied to the liability. At the same time, collection activities are often suspended and your collection period is extended while the offer is in review. Installment payments during this time can be suspended as well, though again it is best to speak with a tax professional to determine how this process will work and what payments you should pay specifically.
After an offer is accepted, it is your responsibility to meet all terms listed on Form 656 until the full liability is repaid. If you receive a refund it will be applied to your existing tax debt. If your offer is rejected for any reason, you are given 30 ays to request an appeal. This requires a separate form, 13711.
If you are interested in learning more about the benefits of filing for an offer in compromise, The Tax Defense Group can help. We are a trusted name in tax relief and can work with you to ensure your offer has the best chance of being accepted.