Dealing with tax debt can be overwhelming, especially when you’re struggling financially. If you’re in this situation, you’re not alone. Many Americans face similar challenges. An IRS offer in compromise might be a solution. This program allows eligible taxpayers to settle their tax debt for less than the total amount owed. It can be a lifeline for those struggling with tax debt, offering a fresh start and financial stability.
An IRS offer in compromise is an agreement between you and the IRS to settle your tax liability for less than what you currently owe. It’s designed for taxpayers who can’t afford to fully pay or if doing so would create a financial hardship.
The IRS evaluates several factors when assessing an offer in compromise. They look at your ability to pay, income, expenses, and asset equity.
The IRS won’t accept an offer if they believe you can pay your full debt. They seek a compromise beneficial for both the taxpayer and the government. Consider a tax payment strategy to best address your needs.
Not everyone qualifies for an offer in compromise. Certain criteria determine eligibility. You must have filed all tax returns and received a bill for at least one tax debt included in your offer. All required estimated tax payments for the current year must be made.
Business owners with employees must make all required federal tax deposits. This includes deposits for the current quarter and the two preceding quarters. You’re ineligible if you’re in an open bankruptcy proceeding.
It’s essential to resolve any open audits or outstanding innocent spouse claims before applying. Understand your tax return status and resolve any issues before applying.
If you believe you might be eligible, understand the offer in compromise process.
Calculate a minimum offer amount that the IRS is likely to accept. Use Form 656, Offer in Compromise to help you with this. A federal tax professional can provide guidance in determining this amount.
You have two payment options when submitting an offer: Lump Sum Cash or Periodic Payment. With Lump Sum Cash, pay 20% of the offer upfront and the remainder in five or fewer payments within five months of acceptance. With Periodic Payment, you submit your initial payment with your application.
You then make monthly installment payments while the IRS evaluates your offer.
If accepted, you will continue making these payments until paid in full (within 24 months). Direct Pay is a secure way to submit your payments.
To apply, submit Form 656, Offer in Compromise, along with Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. Include a $205 application fee (unless you qualify for a low-income exception) and the initial offer payment (unless exempt).
The IRS will evaluate your offer, which can take several months. They might request additional information. They may also seek clarification during this time. Create an online account for streamlined communication and updates.
If your offer is accepted, meet all terms, including filing returns and making payments. If rejected, you have 30 days to appeal the decision.
If you are concerned about the application fee and initial payment, a low-income certification might waive these requirements. Eligibility exists if your adjusted gross income is at or below 250% of the federal poverty guidelines.
The IRS offers resources to guide you.
The Offer in Compromise Pre-Qualifier Tool can help determine your eligibility and estimate an acceptable offer amount. It’s beneficial before formally applying. It will help you decide if you are qualified.
The Form 656 Booklet is a valuable guide to the offer in compromise process. It contains detailed instructions, forms, and FAQs. Use it throughout the process.
While helpful, an offer in compromise has challenges. Maintaining compliance for five years following acceptance is mandatory. This means filing returns and paying taxes on time. Failure to do so can revoke the offer and reinstate the original debt.
Accepted offers are public record. The IRS makes specific details available for public review. Be prepared for that to be public information.
Tax refunds in the year of acceptance will be applied to the debt. Collection activities generally pause while the offer is under consideration, although a Notice of Federal Tax Lien might be filed.
Other options exist if you don’t qualify for an offer in compromise or if it’s rejected.
An installment agreement allows you to pay off your tax debt over time with monthly payments. This can be helpful if you can’t pay immediately but can manage over time.
Currently Not Collectible status might be an option if paying your tax debt would prevent you from covering essential living expenses. This temporarily halts collection efforts, though interest and penalties still accumulate.
In some cases, penalties can be removed from your tax debt. While not affecting the principal, this can lessen the overall burden. Requesting penalty abatement requires specific justification.
Navigating tax debt is challenging. The IRS offer in compromise offers a potential solution. It’s a path toward financial recovery, giving eligible taxpayers a chance at a fresh start. It helps manage your tax liability.
Remember, addressing tax debt is intricate, and what works for one taxpayer might not work for another. Consulting with a tax professional can provide valuable guidance when considering an offer in compromise. They can explain your options. They may even offer alternative payment plans.
Take control of your financial future. Explore available options. An offer in compromise may help resolve your tax debt issues and empower you to move forward confidently. Consider paying your estimated taxes throughout the year to avoid potential large balances due.
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