IRS tax debts can be a source of frustration, uncertainty and stress. If you’re facing a tax burden that you can’t pay, an Offer in Compromise may be one way to settle your debts. When the IRS accepts your offer, the Offer in Compromise is one way that you can resolve your overdue taxes with the IRS and get a fresh start.
What is an Offer in Compromise?
An Officer in Compromise is a tax relief program of the Internal Revenue Service that resolves an outstanding tax liability for less than the entire amount due. The IRS allows qualifying taxpayers to make an offer to settle their entire tax debt for a fraction of the total debt. The goal of the Offer in Compromise program is to collect at least some of the outstanding tax debts while giving the taxpayer the opportunity to become current on their obligations to the United States government.
How does an Offer in Compromise work?
An Officer in Compromise occurs when a tax debtor makes an offer to the IRS to pay a portion of their outstanding tax debt. IRS representatives decide whether to accept the offer or reject it. There are requirements for all offers and guidelines for whether the IRS can accept the offer. If the IRS accepts the offer, the debtor pays the taxes according to the settlement agreement. The remaining debts are discharged and the debtor once again returns to paying taxes according to U.S. tax law.
Is an Offer in Compromise right for me?
Whether an Offer in Compromise is right for you depends on your tax liabilities, the likelihood of the IRS accepting your offer and your ability to pay according to the terms of the offer. The IRS accepts about 40 percent of the offers they receive. Because there’s a downpayment that goes along with making an offer, it’s critical to make an offer that the IRS is likely to accept. An Offer in Compromise may be right for you if you’re unable to pay your tax liability and you can make a reasonable offer according to IRS guidelines.
Why would the IRS accept an Offer in Compromise?
It may seem like the Offer in Compromise program isn’t a good deal for the government. If the taxpayer owes the entire tax debt, it may seem more logical for IRS agents to continue to try and collect the debt. There are several reasons why the IRS participates in the OIC program.
It’s more advantageous for the IRS to collect the debt quickly. Even if they collect a lower amount, it may be worth it to the IRS to have the money now instead of later. The longer the debt drags on, the less likely the government is to collect anything at all. In some circumstances, IRS agents believe that it’s better to get less now than risk collecting nothing at all.
Why should I make an Offer in Compromise?
An Offer in Compromise can help you in multiple ways. If you’re unable to pay your tax debt, an OIC can help you resolve the issue with the IRS for an affordable amount. Also, while an OIC is under consideration with the IRS, the IRS stops garnishments and temporarily ceases asset seizure proceedings. It may be advantageous to you as a debtor to stop garnishments and make payments under the terms of the OIC. An experienced tax attorney can help you determine if it’s in your best interests to make an offer.
How do I make an Offer in Compromise?
There are two ways to make an Offer in Compromise. The first way is to make a lump sum payment. With a lump sum payment, you pay 100 percent of the offered amount within five months. You must also make a 20 percent down payment when you make the offer.
The other type of OIC is an offer for periodic payments. If you offer to make periodic payments, you must pay within 24 months of the IRS accepting the offer. You must make the first payment with the application.
To determine what amount you have to pay, the IRS looks at how much they’re likely to collect if they continue to try and collect the entire tax liability. If the IRS finds that you can pay your debt in full, they’re unlikely to agree to a settlement. The amount that the IRS believes you can pay depends on your assets and your disposable income.
The IRS calculates the value of your assets based on what they’re worth if they’re sold quickly. They also factor in your disposable income to determine what’s called your net realizable value. If you make an offer that’s at least as much as your net realizable value, there’s a good chance that the IRS is going to approve the offer.
Am I eligible to make an Offer in Compromise?
You’re eligible to make an offer in compromise if several conditions are true:
- There’s an outstanding tax bill
- It’s an economic hardship to require you to pay the full amount or there’s a doubt about the validity of the full amount
- You file all of the required tax returns
- Estimated tax payments are up to date if you’re self-employed or own a business
- If you’re a business owner, payments are up to date for employees
- There’s not a pending bankruptcy proceeding
How can I make an Offer in Compromise successful?
If you’re considering making an Offer in Compromise, it’s critical to make a payment that’s realistic based on IRS guidelines. You want your offer to be the lowest amount that the IRS is going to accept. An experienced estate planning attorney can help you determine if an Officer in Compromise is in your best interests. They can also help you understand how it can benefit you and what steps you need to take to make your offer successful.