Offer and Compromise Taxes

Dealing with tax debt can feel overwhelming. If you’re struggling to pay the IRS, an offer in compromise (OIC) might be a solution. This program lets some taxpayers settle their tax debt for less than they owe.

Is an offer in compromise right for you? How does it work? We’ll explore this tax relief option and help you see if it could offer financial freedom.

Table of Contents:

  • What is an Offer in Compromise?
  • Who Qualifies for an Offer in Compromise?
  • How to Apply for an Offer in Compromise
  • How Much Should You Offer?
  • The OIC Evaluation Process
  • What Happens If Your Offer is Accepted?
  • What If Your Offer is Rejected?
  • Alternatives to an Offer in Compromise

What is an Offer in Compromise?

An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS. It settles tax debt for less than the full amount. This helps people who can’t afford their full tax liability or if paying in full would cause financial hardship.

An OIC can be a lifeline. A small business owner struggling after the pandemic settled a $100,000 tax debt for $30,000 through an OIC. It gave her a fresh start, although it was a challenging process.

The IRS doesn’t accept every offer. Each application is carefully evaluated. They consider what’s best for both the government and the taxpayer.

Who Qualifies for an Offer in Compromise?

Not everyone with tax debt qualifies for an OIC. The IRS has eligibility requirements.

  • You must have filed all required tax returns.
  • You must have received a bill for at least one tax debt included in your offer.
  • You cannot be in an open bankruptcy proceeding.
  • You must make current year estimated tax payments.
  • Business owners with employees must be current on federal tax deposits.

Meeting these requirements doesn’t guarantee acceptance. The IRS will review your ability to pay, income, expenses, and asset equity. This helps them decide if an OIC is right for your tax situation.

How to Apply for an Offer in Compromise

Applying for an OIC is detailed. It requires careful preparation and supporting documentation.

  1. Use the IRS Offer in Compromise Pre-Qualifier Tool to see if you’re eligible.
  2. Gather financial information: income, expenses, asset value, and liabilities. Consider your individual income tax as part of your finances.
  3. Complete Form 656 (Offer in Compromise). Also, complete Form 433-A (individuals) or 433-B (businesses).
  4. Calculate your offer amount. Base this on your ability to pay, future income, and allowable living expenses.
  5. Choose a payment option: lump-sum or periodic payments.
  6. Submit your application with the application fee and initial payment. The application fee varies by the payment option chosen.

Be honest and accurate. Inaccuracies or omissions can lead to rejection.

How Much Should You Offer?

Figuring out your offer amount is crucial. The IRS expects an offer that reflects what you can truly afford.

The IRS will look at your income, expenses, asset equity, and what you could earn in the future. Think about your tax year income and income tax liability.

Here’s a basic IRS formula. Consult a tax professional to tailor an offer to your specific circumstances. Consider all of your payment options, tax liability, tax returns and more to find what best fits your individual tax.

CalculationResult
(Monthly Income – Allowable Expenses) x 12 + Value of AssetsMinimum Acceptable Offer

The OIC Evaluation Process

The IRS evaluates your application after submission. This takes several months, sometimes up to two years for complex cases.

During evaluation, the IRS verifies your application, may ask for documents or clarification. Tax debt collection is usually paused, and refunds are applied to your debt. Your tax payment and federal tax payment is temporarily paused during this evaluation process. Also consider your low income certification, bankruptcy proceedings, open bankruptcy, credit cards and tax credit before submitting the application.

Patience is vital during this period. Rushing the process doesn’t help.

What Happens If Your Offer is Accepted?

If the IRS accepts your offer, there are still a few important steps to take. Congratulations. Your journey isn’t finished. You’ll still need to pay all of your income taxes to the IRS.

You must pay as agreed, follow tax laws for five years, and apply refunds to your tax debt during the offer period. Meet these terms for true tax relief. Otherwise, the offer might be revoked, with the original amount plus penalties.

Not complying could reinstate the original tax liability and credit card debts, as well as further tax administration complexities.

What If Your Offer is Rejected?

If your offer is rejected, you still have other options. You can appeal with Form 13711 within 30 days, revise your offer, or look at other payment options like an installment agreement.

Many OICs are successful after an initial rejection. Learn why your offer was rejected to improve the next attempt. Use the revenue service to get help, and check any penalties from the tax year to avoid further individual tax debts.

If you are struggling, you may qualify for low-income certification and programs associated with it, like programs for paying income tax, federal tax, required tax, or any business taxes.

Alternatives to an Offer in Compromise

An OIC isn’t the only tax relief option. There are others worth exploring.

  • Installment Agreement: Make monthly payments. Make periodic payment or pay a lump sum. This will be applied towards the tax debt owe or towards any payment plan established.
  • Currently Not Collectible Status: Pauses collection if you can’t pay due to hardship. Consider special circumstances to support your claim. Use any payment options, special circumstances or required estimated tax payments you may have.
  • Penalty Abatement: Removes penalties if you have a good reason, for example economic hardship or any other special circumstances. Submit your low-income certification with it if you are certified.
  • Bankruptcy: Sometimes discharges tax debts. Talk to your bank account advisor to explore this option.

Each option has advantages and disadvantages. Understand your options before acting. Review all forms and details required such as filing your tax return, and your tax year.

Dealing with offer and compromise taxes can be tricky. It’s a valuable option for managing significant tax debt. Be sure to accurately file all of your required tax, business taxes, federal taxes, individual tax and income tax with each tax return so it matches with the records at the internal revenue service or irs offer.

An OIC isn’t a quick or sure solution, but it can aid financial recovery. Remember honesty, thoroughness, and patience. Use internal revenue or internal revenue service resources to ensure the proper payment plan or options that suit your business tax, estimated tax payments, special circumstances, or overall individual tax and financial needs.

Don’t hesitate to get professional advice if you’re confused by anything. Use your resources and file your required tax returns and required tax as soon as possible. With the right approach, an OIC might help you toward financial freedom and lessen the burden of tax debt.

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