When you owe a ton of money to the IRS and it looks like you’ll never be able to pay it off, there is an option available to you. Called an Offer in Compromise (OIC), the idea is to approach the IRS and make them aware that you’d like to settle your tax bill but are unable to. Instead you’d like to make them an offer to pay a part of the bill and would like to have the rest of it forgiven. It’s a negotiation process. You make an offer and whether or not it is accepted is totally up to the IRS.
How to Apply for an Offer in Compromise
In order to be deemed eligible for an Offer in Compromise, you must first apply to the IRS by filling out Form 656. This form will officially enable you to offer a reduced amount of cash in exchange for not having to pay the remainder of your tax debt. The form is a formal agreement between you and the IRS concerning your unpaid taxes. There is no guarantee the government will agree to your offer. At the time you submit Form 656, you must also submit Form 433-A, which is a Collection Information Statement – the full name is Collection Information Statement for Wage Earners and Self-Employed Individuals. The form is a detailed record of your financial situation. Along with Form 433-A, you must also submit Form 433-A Worksheet, which contains a formula for figuring out how much you should reasonably offer.
Grounds for Accepting an OIC
There are three basic reasons an Offer in Compromise may be accepted by the IRS. If you don’t meet their standards for any of these reasons your OIC will more than likely be denied.
- Your OIC may be accepted if you can prove to the IRS that you will be unable to meet your tax burden within the designated time frame. You will need to able to demonstrate there is no feasible way for you to come up with the money.
- You must show there has been an error made by the tax examiner in determining the amount of tax you owe. You will need to present impeachable evidence to substantiate your claim. There are three basic ways to do this. One is to prove the examiner made a mistake in interpreting the law. Another way is to show they didn’t properly consider the evidence you submitted. The third way is present new evidence that will prove you don’t owe the amount you’re expected to pay.
- You must admit that you actually owe the amount the IRS says you do, and have the means to pay it in full, but doing so would produce undue suffering. In order to be eligible for an OIC under this condition you must be able to prove that paying the entire amount would be unfair and discriminatory, and would be economically disastrous.
If your OIC met the criteria, and the IRS was willing to accept a lesser amount to settle your tax debt, you will be able to choose one of three payment options. You must first pay a one-time fee of $150 along with Form 656. In all three choices, the payments must be made in non-refundable installments.
Lump Sum Cash Offer
This method allows you to settle the tax debt with five installment payments or less. A Lump Sum Cash Offer must be paid within an agreed upon period up to 60 months from the time of acceptance. You must also pay 20 percent of the offer amount when you submit Form 656.
Short-Term Periodic Payment Offer
This method requires you to pay the agreed upon amount over a period of 24 months from the time the IRS received your offer. The first payment and the $150 filing fee are due when you submit Form 656.
Deferred Periodic Payment Offer
Using this method of collection, the IRS expects you to pay your debt off over the remaining period of time in which they can legally collect the debt. The first payment and the $150 filing fee are due when you submit Form 656, the same as a Short-Term Periodic Payment Offer.
Seek Professional Advice
Before submitting an Offer in Compromise, you should seek the counsel of a professional tax attorney or an accountant that is well versed in tax matters. Have them look over the documents and make sure everything is in order and that your financial situation will allow you to make the payments you are suggesting.
This is a guest article by Bailey Harris. Bailey writes for InsuranceQuotes.org.