Understanding the Offer in Compromise Program: Settling Tax Debt with the IRS

Introduction

Dealing with overwhelming tax debt can be mentally and emotionally challenging. When the burden of unpaid taxes seems insurmountable, seeking a solution becomes imperative. Bankruptcy might not be the answer, as it generally does not discharge tax debts. In such circumstances, the Internal Revenue Service (IRS) offers an option known as an Offer in Compromise (OIC). This program provides an opportunity to settle tax debt for less than the full amount owed, giving individuals a chance to regain financial stability.

The Offer in Compromise Explained

An Offer in Compromise is a potential lifeline for those struggling with substantial tax debt. However, gaining approval for an OIC is not guaranteed, as only about one in three applications are accepted. Despite the odds, exploring the possibility of an Offer in Compromise is essential for individuals seeking relief from their tax burden.

The Three-Step Application Process

Applying for an Offer in Compromise involves three critical steps:

1. Form Completion: Fill out IRS forms 433-A and 656. If appealing the debt, IRS form 656-L is also required.
2. Application Fee: Pay a nonrefundable application fee of $205. Qualifying for a fee waiver is possible for those meeting IRS low-income guidelines.
3. Propose an Alternative Payment: Suggest an amount to settle the debt. Demonstrating an inability to pay both bills and tax debt significantly increases approval chances. Include 20% of the proposed amount with the application.

Qualifying for an Offer in Compromise

Eligibility for an Offer in Compromise depends on meeting specific criteria. To apply, ensure:

• All form questions are answered.
• Tax returns are up-to-date.
• The application fee is paid or waived.
• At least one tax debt is unpaid.
• Estimated tax payments for the current year are submitted.
• You are not undergoing bankruptcy proceedings.
• Tax payments and returns continue while the IRS reviews your offer.
• Your case has not been sent to the Justice Department by the IRS.

Meeting these criteria is crucial; any discrepancies will lead to application rejection.

The Qualification Process

Qualifying for an Offer in Compromise involves a detailed assessment of your financial situation. The IRS evaluates factors like assets, income, potential earnings, cost of living, and debts to calculate a "Reasonable Collection Potential." This amount dictates whether your suggested payment is acceptable. IRS approval typically stems from financial hardship, disputes about the owed amount, or doubts about full debt recovery.

The IRS Offer Structure

If the IRS accepts your Offer in Compromise, two payment options are available:

1. Lump Sum Payment: Pay off the debt within five months.
2. 24-Month Payment Plan: Pay the debt in installments over 24 months.

In both cases, the 20% submitted with the application counts as the first payment.

Waiting for IRS Response

After submitting your Offer in Compromise and supporting documents, IRS collection activities halt. Tax liens remain until a decision, and any owed tax refunds continue unless an amended return is submitted post-activation. For those waiting for an IRS response while facing a garnished refund, a hardship-based offset bypass refund is possible. In case of rejection, appeals and alternative options like installment plans or "currently not collectible" status can provide relief.

Exploring the Option

An Offer in Compromise can be a lifeline for individuals grappling with insurmountable tax debt. If you find yourself unable to pay your tax debt, exploring this option is essential. To identify the best solution for your specific circumstances, reach out to us for expert guidance. Our professionals can assist you in making an informed decision to regain control of your financial future.

Remember, taking action today can pave the way for a brighter and debt-free tomorrow.