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Offer In Compromise

Offer Compromise IRS can reduce tax debt

An offer in compromise in a process created by the Internal Revenue Service which allows the taxpayer to settle their back taxes or tax liability for less than the taxpayer owes. Not everyone will qualify for an offer in compromise. To qualify, most taxpayers will have to prove they are unable to pay their tax liability either through another IRS tax settlement option or in a lump sum payment.

The offer in compromise is often the last option for the taxpayer, but may be offered by the Internal Revenue Service (IRS) if the IRS believes it will allow the taxpayer to meet all of their future tax liability and filing requirements.

Types of Offers in Compromise:

  • Doubt as to Collectability- The Internal Revenue Service may allow an offer in compromise if the tax payer can prove that they will not be able to pay the full amount of taxes owed with in the collection period. For example, if a taxpayer owes $30,000 in tax debt and their current income is not great enough to cover their current cost of living and they do not have any other assets or property, the taxpayer may be able to claim they will never be able to pay the tax debt either through a lump sum payment or with an installment plan.
  • Doubt as to Liability- If a taxpayer can prove that the calculated tax liability is incorrect due to a mistake or interpretation of the law, tax evidence, or new tax evidence, they may be eligible for an offer in compromise. It is important to contact an Enrolled Agent, Certified Public Accountant (CPA) or Tax Attorney who can review tax liability and provide information about Doubt as to Liability.
  • Effective Tax Administration- If an exceptional circumstance exists that makes collection of the tax debt a severe economic hardship or collection is unfair or inequitable, the IRS may consider an offer in compromise. Under the Effective Tax Administration, the accuracy of the tax liability is not in question. Special cases may include individuals who are providing care for a special needs child who requires constant care and the resources and assets of the family are needed for quality medical care for the child.

Offer in Compromise Payment Methods:

The Offer in Compromise (OIC) program allows for three payment options. In addition, there is a $150 application fee and the taxpayer must fill out and submit Form 656, Offer in Compromise. The three payment options include:

  • Lump Sum Cash Offer- If a taxpayer chooses the lump sum cash offer, the payments must be made in five or fewer installments. The IRS will send written notice of the offer in compromise acceptance. The payments are non-refundable, and a non-refundable payment of 20 percent of the offer in compromise offer must be sent with the $150 application fee and the Form 656 Offer in Compromise. A Tax Professional should be contacted prior to completing the Form 656.
  • Short Term Periodic Payment Offer- The offer in compromise amount is paid with in 24 months from the date the Internal Revenue Service gets the offer. The first payment for the short term periodic payment offer and the application fee should be sent together with the Form 656. In addition, regular payments must be made during the offer in compromise investigation. It is important to contact an Enrolled Agent, CPA or Tax Lawyer if you are considering a Short Term Periodic Payment Offer.
  • Deferred Period Payment Offer- The offer in compromise amount is paid through out the remaining statutory time period for collecting the tax liability. The first payment for the Deferred Period Payment Offer is sent with the application fee at the same time the taxpayer files Form 656. A Tax Professional can help you negotiate your Deferred Period Payment Offer.

Benefits of the Offer In Compromise Program

Offer in compromise is one of the best tax settlement options allowed because in many cases the taxpayer will be able to negotiate a lower tax settlement amount. Often the Internal Revenue Service will accept an offer in compromise if they believe the offered amount is an accurate reflection of the amount that could be reasonably collected.

The goal of the Internal Revenue Service is to collect as much of the tax debt as possible, as fast as possible, at the lowest possible cost for the federal government. The offer in compromise has become a good tax settlement option which helps the Internal Revenue Service obtain those goals with out having an extended settlement agreement or having to mark a tax liability as "not collectible".

Do I need a help negotiating with the IRS?

It is possible to complete the offer in compromise paperwork by yourself. An Enrolled Agent, CPA or Tax Attorney, however, will have extensive knowledge and the necessary skills to prepare and negotiate an offer in compromise with the Internal Revenue Service. In some instances, an experienced advocate may be needed to appeal a rejection for an offer in compromise. Can you request an offer in compromise without help, of course, but is it a good idea, probably not. In the long run, getting the help of an Enrolled Agent, CPA or Tax Attorney early may be able to save you money.