In case you owe a significant amount in back taxes but are unable to pay the amount in full, then asking for an Offer in Compromise to the IRS can be the road to go. Letters and notices that come from the IRS can be scary and intimidating at the same time. It’s mostly because all the penalties and interest you’ve avoided till today might come rushing in. However, with the help of an Offer in Compromise, you can further settle your tax debt in less than what you originally owe (sometimes usually lower).
So, what is Offer in Compromise?
An Offer in Compromise (OIC) is a type of program that is usually offered by the IRS enabling taxpayers to settle their tax debt for less than the original amount they owed. The IRS might accept an offer in compromise in case they decide that it is the best possible way to acquire the amount you owe, given the fact that the taxpayer is unable to pay the full amount because of financial hardship. This is where we answer the question “What is Offer in Compromise with IRS?“
Here, you simply make a payment offer – typically less than the amount you owe – and if the IRS seems to nod a yes, consider the bill paid in full.
If a taxpayer qualifies, they can further also submit an OIC application to the Internal Revenue Service (IRS), along with a given application fee and initial payment. Following the same, the IRS will thoroughly examine the application, besides the financial information of the taxpayer, in order to determine whether or not they should accept the order.
Negotiating an Offer in Compromise can often be a complex and lengthy procedure, which is why it’s best to get in touch and seek guidance from a tax professional in order to fully navigate through the process, simultaneously increasing their chances of success.
This is exactly what is an offer in compromise IRS.
Offer in Compromise Example
Here’s an Offer in Compromise example,
Ariana owes around $50,000 in back taxes to the IRS. However, with being unemployed today and having no assets to sell, she has come to a point where paying off the debt might create greater issues. She has filed for bankruptcy in the past, making it incredibly difficult for her to borrow any money.
Ariana has no option but to apply for an Offer in Compromise with the IRS, hoping to settle the debt with an amount less than what was originally owed. For the same, she provides the IRS with financial information, including but not limited to income, expenses and assets.
Carefully reviewing the case, the IRS comes to the conclusion that Ariana can pay only about $10,000 towards her debt. The IRS accepts the amount as a full payment, as long as she adheres to every future tax law.
Who Qualifies for an Offer in Compromise?
How to qualify for IRS offer in compromise? The question has been long asked. In order to qualify, a taxpayer should first be unable to repay their full tax liability or evidently show that repaying the tax bill in full can actively cause them financial hardship.
There are no direct requirements for the Offer in Compromise, but note that you cannot apply for it in case you are in a bankruptcy proceeding. The IRS is going to examine a variety of factors when evaluating your offer, including but not limited to the future income, assets, debts, or the overall ability to pay the tax debt in full.
In case you are considering an Offer in Compromise, the best thing to do is to use the pre-qualifying tool. This is because it requires a $205 application fee, which makes it important to understand whether you qualify for the same before even moving forward with it. This is how to qualify for offer in compromise.
How to Get an Offer in Compromise?
The Offer in Compromise might sound like an easy deal, yet sometimes it is not. To get an Offer in Compromise, you are required to submit a couple of forms and also offer them documentation of your income, and consequently pay the application fee.
With it, you will probably also need to make an initial payment, depending on which payment plan you are going to choose. So, how to get IRS to accept offer in compromise?
The Application Process
The application process starts with:
- IRS form fill up: IRS form 656 and 433-A (in case of individuals) or Form 433-B (in case of businesses).
- Pay the Application Fee: You need to pay the application fee. In case you need the IRS Low-Income Certification Guidelines, the fee will potentially be waived.
- Initial offer payment: This payment must be a minimum of 20% of your offer. The remaining balance, once the initial payment is accepted, can be fulfilled monthly.
How much should you be offering?
Many want a payment plan as low as possible. However, it is important to remember that around two-thirds of the total Offer in Compromise was rejected just last year. If you want yours to not be turned down, make sure all the values you put are justified and have real meaning. To do the same, you’ll need all the financial details in hand, like your income, bank balance or the value of investments or assets that are to your name.
How Does An Offer In Compromise Work?
Several taxpayers have a question stirring their minds, “how does IRS offer in compromise work?” An Offer in Compromise is simply an agreement between a taxpayer and the IRS which helps to settle the tax liabilities for an amount less than what was originally owed.
The IRS may accept an Offer in Compromise in case they determine that the amount the taxpayer can afford to pay is less than the original, calculated amount.
In order to determine the eligibility for an OIC, the IRS takes in hand the taxpayer’s ability to pay, their income, expenses, and assets owned. If they qualify, the next thing to do is submit the form of Offer in Compromise.
What to do if your OIC Application if Rejected?
Many taxpayers become shaky and claim “The offer in compromise rejected now what”? Rejections are very common with OIC Applications. In case your Offer in Compromise is Rejected, you can further appeal the decision using the IRS form 13711. It is to be filled out within 30 days from the date of the rejection notice.
One of the other options is to submit a new offer. It can be done with a letter detailing the new offer amount or by filling out form 656. Need help with your Offer in Compromise? Contact our tax advisory services!
If you are in a position where paying the debt in full can cause you hardship. The next best thing to do is send an Offer in Compromise. Sending an Offer in Compromise with the details about why paying the tax debt in full can cause you financial hardship. However, always remember that sending an Offer in Compromise does not solve everything in one go if you do not have the documents to support your claims. Make sure you have all the supporting documents that can help prove your situation to the IRS.