Many people owe money to the IRS during tax season. However, financial hardship can make it difficult to pay a lump sum right away. Therefore, the IRS offers options to help eliminate financial stress and help taxpayers make payments that work for their budgets.
An offer in compromise is one option that offers significant tax relief for many individuals and families. This may be a good choice for you if you are facing a large tax payment.
What Is an Offer in Compromise?
An offer in compromise is a settlement in which the taxpayer and the IRS agree to a smaller sum than what is originally owed. This allows the IRS to collect at least some of the money while offering relief to the taxpayer if they cannot afford the entire amount. The IRS accepts thousands of offers annually, making an offer in compromise a real option for many taxpayers.
There are different kinds of offers in compromise that may work for your situation. Work with a tax professional to help determine which is best for you.
Though the initial lump sum may be impossible for the taxpayer to pay, a lump-sum offer in compromise occurs when the IRS and taxpayer agree to a reduced cost that the taxpayer will pay within five months of the agreement approval. Taxpayers usually have to pay 20% at the time of application to qualify.
A periodic payment offer in compromise requires the same 20% down payment as a lump-sum offer. However, a periodic payment offer can be paid over a six- to 24-month period after the application is accepted. As a result, monthly payments offer many taxpayers flexibility and allow them to pay what is owed without creating undue financial insecurity.
Qualifying for an Offer in Compromise
Not everyone qualifies for an offer in compromise. The IRS will ultimately determine whether you are a candidate for this program. It will assess:
- Your assets
- Your equity
- Monthly income
- Monthly expenses
- Your ability to pay
The IRS requires that one of the following is true for a taxpayer to qualify for an offer in compromise:
- The taxpayer is facing financial hardship, and paying the full debt amount would worsen this condition. For this to apply, the taxpayer must be working at least 30 hours per week but would still face financial difficulties if they paid the entire amount.
- You cannot afford to pay the entirety of your taxes during the statute of limitations, usually 10 years.
- There is doubt about how much you owe in taxes or a reason to believe that the sum that the IRS is requesting is inaccurate. In these situations, an offer in compromise may be an alternative to an audit.
It is difficult to be sure whether you will qualify for an offer in compromise without the help of a qualified tax attorney. What’s more, you need to be otherwise up to date on your taxes and have records of your federal and state returns and receipts from any deductions. There is a significant amount of paperwork required to apply for an offer in compromise.
Submitting an Offer in Compromise
To apply for an offer in compromise, you must submit Form 433-A (OIC) for individual filers or 433-B (OIC) for business filers to the IRS. Each form requires additional documents to be submitted at the same time.
You must also submit Form 656(s) for any tax debt you have as an individual or business. Each category must have a separate form. These forms require an initial payment that is not refundable.
To apply for an offer in compromise, you must pay the application fee of $205. This is not refundable unless the IRS cannot process your application because of ineligibility.
The best way to submit an offer in compromise is through an skilled tax attorney. With professional help, you can be sure that your application is properly filled out and that you have the best chance of being accepted.
Appealing an Offer in Compromise Decision
The IRS allows you to appeal an offer in compromise rejection within 30 days of the date on the rejection notice. To do so, you must fill out Form 13711, Request for Appeal of Offer in Compromise. If you do not wish to fill out the above form, you may write a formal letter. This letter must contain the following:
- Your legal name, permanent address, Social Security number, and a phone number
- A statement that explains that you wish to appeal a rejected offer in compromise
- A copy of your offer in compromise rejection from the IRS
- The years that the offer in compromise covers
- The points of dispute and why you are disputing them
- Additional information that you want the IRS to consider
- Documents, law citations, and other information that supports your disagreement on specific points
- An original signature stating that the information in the letter is true
If you opt to write a letter rather than submit the appeal document, you must still comply with the 30-day window for your appeal to be considered.
Alternatives to an Offer in Compromise
If an offer in compromise is not the right option for your situation, there are other ways to approach your taxes if you cannot pay.
For example, a non-collectible status may allow you to suspend IRS activity on your account for a period of time. During this time, you are not required to make monthly payments, and the IRS will reevaluate your economic status after six to 12 months. This option is only available for those facing significant financial hardship.
Installment agreements require you to pay the full amount owed to the IRS, but on a monthly basis rather than in a lump sum. However, if your offer in compromise is rejected, or you are facing temporary financial setbacks, an installment agreement may help you to pay your taxes without requiring a lump sum.
Why Hiring a Tax Attorney is Helpful
Applying for an offer in compromise is complicated, and many applicants execute the process incorrectly. Mistakes can lead to ineligibility, rejection, or further consequences. When you have a tax attorney to help, you can be sure that your application has been properly filled out and filed, giving you the best chance of IRS approval. A tax attorney can help you gather the required documents before completing the application, as well as help to complete the application itself.
Offers in compromise require that you make an offer to the IRS of how much of your taxes you can pay. An attorney can help you evaluate your financial situation accurately and develop an offer that is suitable for you. If the offer is appropriate for your situation, your application is more likely to be accepted.
You Can Rely on Delia Law for an Offer in Compromise
Our team at Delia Law has been providing skilled tax help for many years. As qualified attorneys, we understand the minutiae of all tax-related processes and can help you to apply for programs that are right for you. Offers in compromise are common in our business, and we have the utmost confidence that we can help you to navigate your pre-application, application, and post-application processes.
For more information about our firm or to schedule a free consultation with us, please contact Delia Law.