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How to File an Offer in Compromise

Are you in debt to the IRS? Being in debt is never good but when you owe money to the IRS things can get really ugly. People get behind in tax payments for a lot of reasons, but the IRS usually doesn’t care why you’re in debt. The agency just cares about you paying it off. The bottom line, if you owe back taxes to the IRS you better start paying as soon as you can. The longer it takes, the more you will likely pay in interest and penalties. However, that being said, there is a little wiggle room for certain taxpayers in certain situations.

Pay a Smaller Debt

It’s called an offer in compromise. According to IRS.gov, “An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship. We consider your unique set of facts and circumstances, including the ability to pay, income, expenses, and asset equity.”

The IRS will typically approve an offer in compromise when the offered amount is the most the agency expects to be able to collect in a reasonable amount of time. However, the IRS also encourages taxpayers to explore all their options to pay off the debt before they file an offer in compromise. This program will not work for everyone. Additionally, if you decide to file an offer in compromise with the help of a tax professional be sure you know that he or she is qualified.

Make Sure You’re Eligible

So if you decide that an offer in compromise is right for you, the next thing you need to do is determine your eligibility. It’s a good idea to use the IRS’s Offer in Compromise Pre-Qualifier worksheet to make sure. Here are a few of the requirements.

  • You must file all required tax returns first
  • The IRS has to have sent you at least one bill for your current tax debt
  • You must be current on all your estimated tax payments
  • If you own a business you have to have made all your payroll deposits as well

Reasons for Filing

You also have to have a good reason to file an offer in compromise in order for the IRS to accept it. Your situation must fall under one of these grounds:

  • Doubt as to collect-ability
  • Effective tax administration
  • Doubt as to liability

How to File

If you meet the eligibility requirements and you have grounds for filing, then it’s time to start the process. This is the IRS so it takes a lot of paperwork, starting with Form 656. This is the main form for an offer in compromise. You will need to fill out all the basic information about you and your debt. You’ll also need to choose one of the official grounds for filing. Of course, you must include the terms of your offer, as well. This can be either in the form of periodic payments for six to 24 months or in one lump sum.

Next, you have to fill out a Form 433-A (or for business taxes a Form 433-B). You will have to share all the major details of your financial situation on this form, including your income, expenses, and assets. This is important because the IRS wants to see an offer that is essentially equal to the value of your disposable income or your assets. That’s why you will have to be very detailed as you fill out this form.

After filing this form, you will then have to turn over proof of the information you provided. That means you have to share things like bank statements, pay stubs, deeds, loan documents, etc. If you don’t have this information readily available then you’ll have to obtain it.

A Decision

After the IRS receives your offer they will determine an outcome and inform you of their decision. If they accept your offer, then you must start making payments right away, according to the terms of your offer. If they turn your offer down they will send you a rejection letter explaining why they rejected your offer. A rejection usually occurs because the offer is too low. If that happens, you can resubmit your offer at a higher amount.

Do it Right

The offer in compromise process can be lengthy so be patient and do everything in your power to get it right. If you meet all the requirements and make a fair offer, it could save you a significant amount of money.

kliving98@comcast.net'
Kent Livingston is an online freelance writer. His work experience covers several different industries and spans dozens of topics, including taxes, technology and many legal matters.