Wrestling with IRS debt can feel overwhelming. An IRS compromise, officially an Offer in Compromise (OIC), might be a solution. It allows you to settle your tax debt for less than the full amount owed.
An IRS compromise lets you settle your tax debt for less than what you owe. This is an option if paying your full tax liability would create a significant financial burden. The IRS assesses your ability to pay based on your financial situation.
Factors considered include current income, future income potential, assets (equity in vehicles, property, and bank account balances), and allowable expenses. The offer amount typically should equal or exceed the IRS’s estimate of what it can collect within a reasonable timeframe (the Reasonable Collection Potential).
Consider tax credits and reduced refunds via direct deposit. These are alternatives to explore alongside an OIC to potentially resolve your federal tax debt and avoid a federal tax lien.
An IRS compromise might be suitable if your assets and income are considerably less than your tax debt. It also applies if there’s doubt about your liability (the actual amount of federal tax owed).
Additionally, it’s an option if full repayment would create significant financial hardship (doubt about collectability). If you think an offer in compromise might be a solution, explore further.
Specific eligibility requirements must be met for an IRS compromise. You need to have filed all required tax returns.
You must have received an IRS bill for the taxes owed and made required estimated tax payments. This includes individual and business estimated taxes. If you have employees, ensure all required employer’s quarterly federal tax return deposits are made.
To apply, complete Form 656-B (Offer in Compromise Booklet). You’ll likely also need Form 433-A (wage earners/self-employed) or Form 433-B (businesses). Include an initial, nonrefundable $205 application fee with your application. If choosing the lump sum payment option, include an additional 20% with Form 656.
There are two payment options for an IRS compromise. You can choose lump-sum (five or fewer payments) or periodic payments (six or more monthly installments within 24 months of offer acceptance). Submit all necessary forms and electronic federal tax documents.
If your offer is rejected, file an appeal using Form 13711, following its instructions carefully. An installment agreement is another option. It has different application fees than an IRS compromise, so ensure you’re pursuing the right solution for your situation. This helps in amending a tax return.
You are considered low-income if your income is below 250% of the federal poverty guidelines, as detailed in the IRS Form 656 booklet. Low-income taxpayers qualify for waivers.
This waives the initial application fee and the monthly installment payments during the IRS review period for a periodic payment IRS compromise, as specified in Form 656 Low-Income Certification (section 1). If you’re struggling to understand if you qualify for earned income, look up information about the earned income tax credit.
An IRS compromise can offer relief from overwhelming tax debt. Carefully evaluate your finances and explore all options. Resources like the Global Gate Taxes and tools such as the Offer in Compromise Pre-Qualifier Tool can assist in the process. These resources may lead to financial relief and peace of mind.
If an Offer in Compromise doesn’t fit your situation, consider other options like a Payment Plan (Installment Agreement), the Earned Income Credit, Penalty Abatement, or Bankruptcy to resolve your debt and avoid wage garnishments.
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