Are you worried about a tax bill that you can’t afford? Are you hoping for tax debt forgiveness? Owing more in taxes than you can afford can worry any taxpayer. While you may not be able to attain complete forgiveness of your tax liability beyond filing for bankruptcy, you may be able to pursue another viable option known as an offer in compromise (OIC).
The Internal Revenue Service (IRS) sometimes allows taxpayers to pay their tax debt in installments, but an offer in compromise may be the closest you can get to total tax debt forgiveness.
What Is an Offer in Compromise?
If you’re struggling with an amount of tax debt that you can’t pay, an offer in compromise may be the right option for you.
What If You Cannot Pay Your Tax Bill?
If you can afford to pay your full tax debt, the IRS typically can’t accept an offer in compromise. In this case, you should first consider other payment options. You will save money in the long-term if you can pay your tax bill in full because the IRS charges a penalty and interest on unpaid taxes until this debt is paid off.
If you cannot pay your tax bill, you may be eligible for partial tax debt forgiveness through an offer in compromise.
Offer in Compromise Definition
An offer in compromise is a settlement option that allows you to pay less than your total tax debt. An offer in compromise can help you avoid the worst negative consequences of tax debt, like a federal tax lien being placed on your property.
Are You Eligible for an Offer in Compromise?
How do you know if you qualify for an offer in compromise? The IRS requirements to qualify for an offer in compromise are quite strict. The IRS will consider allowing an offer in compromise in the following situations:
- Doubt as to liability: If there is a genuine dispute about how much you owe or if you owe any amount at all, then you may be approved for an offer in compromise.
- Repaying would create financial hardship: If you have tax debt but paying it in full would result in financial hardship for you or you have exceptional circumstances that could make it unfair for the total amount to be collected, then you may be approved for an offer in compromise.
- Doubt as to collectability: If your income and assets are less than your total tax liability and the IRS thinks it may not be able to fully collect your tax debt, then you may be approved for an offer in compromise.
Additionally, you’ll also need to meet the following requirements to be eligible:
- At least one of your tax bills is included in your offer in compromise.
- You have filed all your legally-required tax returns.
- You are not in an open proceeding for bankruptcy.
- Your case has not been referred to the Department of Justice by the IRS.
- You do not have an open audit for a tax liability or a pending innocent spouse claim.
- If applicable for the current tax year, you have paid all of your mandatory estimated tax payments.
You can use the Pre-Qualifier tool offered by the IRS to determine if you meet the basic eligibility requirements.
How an Amount for an Offer in Compromise Is Determined
You’ll initiate an offer in compromise by filling out Form 656. You’ll offer an amount to the IRS that is greater than or equal to the value of all your assets, including property, bank accounts, vehicles and your future expected income minus your basic living expenses. This is known by the IRS as reasonable collection potential.
For the IRS to determine what you can pay for your tax debt, you may be required to fill out Form 433-A. This form allows the IRS to gather more details about your financial situation, including your expenses and assets.
After examining your ability to pay your tax debt, the IRS will then determine the correct amount for your offer. If your offer is too low for the IRS OIC program, the IRS will give you a chance to update your offer. If you don’t update your offer, the IRS will reject your offer in compromise.
If you disagree with how the IRS valued your ability to pay your tax debt, you can provide the IRS with additional documentation or verification that supports a different valuation.
Costs Associated With an Offer in Compromise
You’ll need to pay the IRS to make a request for an offer in compromise unless you’re filing a doubt as to liability offer in compromise or you meet the low-income guidelines. You can select between two payment options for your offer in compromise:
- Periodic payment plan: In this payment option, you’ll include with your offer an initial payment. After that, you’ll pay the remainder of your balance within six months to two years. While your offer in compromise is being considered by the IRS, you must continue making payments. If you don’t continue making payments, your offer will be rejected.
- Lump-sum payment option: In this payment option, you’ll pay upfront a minimum of 20% of your offer in compromise and then you’ll pay the remainder of your balance in five payments within five months after the IRS accepts your offer. You may also choose to pay the remainder of your balance in fewer than five payments.
Though the payments and fee are nonrefundable, these amounts will be applied to your tax debt. For those who are eligible for a low-income certification, initial payments and monthly payments aren’t required while the IRS is considering your offer.
Are You Eligible for the Low-Income Certification?
If your adjusted gross income is equal to or less than the amount shown under Section 1 of Form 656, then you may qualify for the low-income certification. This amount is based on your location and family size. If you don’t qualify, you may still be able to request a waiver based on your household’s current gross monthly income.
What Happens If Your Offer Is Rejected?
If your offer in compromise is accepted by the IRS, you must meet the terms of your agreement. If you don’t comply with the terms of your agreement, you may be sued by the IRS for the original amount of your tax liability along with interest and penalties.
If your offer is rejected, you can file an appeal within 30 days. Instructions for appealing your offer in compromise can be found in your rejection letter. Alternatively, you can pay your tax debt in full if you agree with the rejection.
How Do I Get an Offer in Compromise Approved?
To get an offer in compromise approved, you first need to meet all of the eligibility requirements, including filing all your tax returns and making all your required estimated tax payments. Aside from these eligibility requirements, the IRS will also consider a few factors that can determine your potential for financial hardship:
- Asset equity
- Level of education
- Collection Statute Expiration Date
These factors will play a role in whether your offer in compromise is approved. Your lifestyle will play a significant role in whether you are approved. For example, if you claim that you cannot pay your tax debt in full, but you own an expensive house and vehicle, you won’t likely be approved for an offer in compromise because the IRS won’t have a reason to doubt collectability. You might still qualify, however, if you have special circumstances that require a high cost of living and the IRS wouldn’t expect you to sell your vehicle or home to pay your debt.
While the IRS reviews your offer in compromise, they will continue monitoring your assets and income to determine whether your ability to pay your tax debt has changed.
Small mistakes made on your offer in compromise forms can have a significant impact on your case. In fact, some mistakes can lead to a rejected offer. Taxpayers should be aware of some of the common offer in compromise form mistakes, including:
1. Leaving Blank Spaces
An easy mistake is leaving spaces blank on a form. When a space is left blank, the IRS can’t determine why this information wasn’t filled out. Did you leave the space blank because the question didn’t apply to you? Were you confused about how to answer? Or was the blank space simply an oversight?
Blank spaces are a minor mistake that can interfere with the ability of the IRS to make a decision about your offer in compromise. So how do you avoid this mistake? Rather than leave spaces blank, you can either write in a zero or N/A if the question doesn’t apply to you.
2. Reporting Negative Equity
Another common mistake is subtracting negative equity from your net worth. For example, if you owe more on your home than it’s worth, you may think that you can report this negative equity to help your case. However, this negative equity should instead be reported as an equity of zero.
3. Making Math Mistakes
Math on Form 433 can get complicated. Completing this math is difficult for most taxpayers, as it requires juggling several figures and complex numbers, along with providing explanations and supporting documents to accompany these figures. Math mistakes made on OIC forms can halt the approval process until these mistakes are corrected.
This is why you should reach out to experienced tax consultants like BC Tax who can help you accurately fill out these forms and correctly perform the required math calculations.
4. Filling out Forms on Your Own
Some taxpayers make the mistake of trying to fill out these forms for an offer in compromise on their own. If you’ve filed your income taxes on your own, you may think you can make an offer in compromise on your own as well. However, trying to tackle this undertaking on your own may result in a rejected offer.
Instead, you should work with professionals who can help you work through the process of an offer in compromise. Tax professionals can help you fill out forms and perform the required mathematical calculations.
Tips for Getting an IRS Offer in Compromise Approved
Looking for more IRS offer in compromise tips? Consider the following tips for how to get an offer in compromise approved:
1. You Should File Your Back Tax Returns
Before submitting your offer in compromise, you should file all the tax returns that you’re required to fill out legally. You must file your tax returns to qualify for an offer in compromise.
2. Your Offer Should Equal the Realizable Value of Your Income and Assets
When determining how much your offer in compromise should be, you should base this number on the realizable value of your potential future income and your assets.
3. You Should Include the Non-Refundable Payment With Your Application
With your application for an offer in compromise, you need to include a non-refundable payment. This amount will be applied to your tax debt. If you are rejected for an offer in compromise, this money will not be returned to you unless you send more than the amount that was required. On Form 656, you must also designate this excess payment as a deposit for it to be refundable.
4. You Should Avoid Accumulating Additional Tax Debt
While the IRS is reviewing your offer in compromise, you should avoid accumulating additional tax debt. While in the collection process, some taxpayers stop making quarterly estimated tax payments, but you shouldn’t put your tax payments on hold while your offer is pending.
Instead, you should continue paying your taxes so you can avoid adding more tax debt to your existing liability. Failing to pay quarterly estimated taxes may result in rejection of your offer in compromise.
Contact BC Tax for Tax Support
If you’re struggling to pay your tax debt, you should take action as soon as possible. If you don’t pay your taxes, the IRS may place a lien against you, such as on your home or your wages. Fortunately, the IRS offers several payment plan options that you could use.
At BC Tax, we’re one of the top tax resolution experts in the nation. We always put our clients first. We’ve helped countless individuals and businesses with tax problems, and we can help you find ways to pay your tax debt. For help with making or using an offer in compromise, contact us at BC Tax today.