Offers in Compromise
An Offer in Compromise is one of the ways a person or business can repay their tax debt with the Internal Revenue Service (IRS). With this method, an Offer of Compromise will allow a debt to be settled for less than the full amount owed. An Offer of Compromise is ideal for a taxpayer who is indebted to the IRS, as it saves money, but it is not a common route the IRS will agree to, if the tax payer can pay the full amount with a payment plan.
In order to qualify for an Offer in Compromise, the taxpayer must meet one of the following:
- Doubt in liability: when there is a genuine argument that the debt belongs to the taxpayer or there is a legitimate dispute as to the correct amount owed.
- Doubt of collectability: when the taxpayer’s assets and income are less than the debt owed and the settlement amount would be the most the IRS could collect.
- Effective tax administration: When the other two circumstances do not apply but there are other mitigating circumstances that could qualify the taxpayer for an Offer in Compromise.
In order to apply, a tax payer also must be up to date with their yearly filings and previous tax payments, currently filing for bankruptcy, pay a $186 non refundable application fee*, file the correct paperwork in a timely manner, and submit an initial payment. The amount of the initial payment is based on whether a taxpayer chooses to pay the the Offer in Compromise as a lump sum or in monthly installments.
The initial payment for a lump sum settlement is 20% of the compromised amount offered. If the Offer in Compromise is approved, the remaining amount must be repaid in five or less payments. An Offer in Compromise can also be paid in monthly installments. The initial payment is the first monthly installment and payments should continue each month while the IRS considers the Offer in Compromise*. Once approved, continue the monthly installments until the debt is paid in full.
*If Low Income Certification guidelines are met, the application fee and initial payment are waived. And the debt repayment does not begin until the IRS accepts the Offer in Compromise.
If at any time, the taxpayer fails to make a payment, the Offer in Compromise is no longer valid and the taxpayer is responsible for the original full amount owed (minus any payments that may have already been made) plus any additional fees and penalties.
Should an Offer in Compromise be rejected, the taxpayer will be notified by mail and eligible to file an appeal. If an Offer in Compromise is returned, it is usually because incorrect forms were filed, necessary forms were missing, the application fee and initial payment were not submitted or the taxpayer had filed for bankruptcy.