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Five Steps for an Offer in Compromise
An offer in compromise is a tax settlement in which a taxpayer pays a sum that is less than the full tax owed.
The IRS is willing to accept an offer in compromise when there is doubt as to whether it could receive a full payment in one of these three circumstances:
Doubt as to collectibility due to the taxpayer’s inability to pay
Doubt as to liability due to a legitimate question of whether the taxpayer owes all or part of the assessed tax
Exceptional circumstance that would make paying in full an economic hardship or unfair and inequitable
The IRS takes a very narrow view of each of the above circumstances, and you should consult with a tax professional to determine your eligibility. If you are eligible, there are five steps you will need to to be approved for an offer in compromise.
1. Determine if your offer in compromise is processable
There are three absolute requirements that must be met to begin the application process. You must not be in bankruptcy proceedings, you must have the $150 fee ready, and you must be able to include a payment of 20% of your offer amount with your application.
2. Gather all required information
You will need copies of your prior year tax returns and must be sure you have filed all returns you were legally required to file. You must also be up to date on estimated taxes for the current tax year. The offer in compromise form will require you to enter your personal information as well as detailed financial statements regarding all of your income and assets during the three months prior to making the offer. Married couples may need to provide information for both spouses even if only one spouse owes taxes — this depends on the community property laws of your state, so ask a local tax professional.
3. Determine the amount of your offer
IRS Forms 433-A and 443-B provide a way of calculating what you will need to offer. In short, your offer must be at least your reasonable collection potential, which is the sum of the value of your assets plus the amount the IRS could expect to collect from your future income. This amount may be reduced by advanced age or long-term illness. Available payment options include lump sum payment, periodic payments within 24 months, and periodic payments up to the statute of limitations.
4. Complete your application
Once you’ve gathered this information, you’re ready to submit your application. Having a tax professional help you is advisable. In addition to the required documentation, you will need to submit the $150 fee and either 20% of your lump sum offer or your first installment payment.
5. Receive the IRS’s response and take action
If the IRS accepts your offer, make timely payments consistent with the terms of your offer and the IRS will release you from future liability. If the IRS rejects your offer, it will keep the payments you made and apply them to your tax debt. You can appeal a rejection within 30 days from the date of the rejection letter.