We have knowledge about the IRS Offer in Compromise Program that can assist with navigating the process. When you receive a big tax bill from IRS, or have a large tax debt, you may be dismayed with paying off the amount all at once. As a matter of fact, IRS has an option for people who cannot afford to pay off their total tax debts. The IRS call this program the Offer in Compromise Program. The form 656 serves this purpose.
In general, dealing with the IRS is mostly through written correspondence when you file a IRS offer in Compromise. It is important to know what to do if you receive an IRS letter or notice. Denial, avoidance, and procrastination are all activities in which an individual may engage when faced with something that he or she would rather not deal with or do. However, such coping tactics are almost always sure to backfire and make an unpleasant or difficult situation even worse. This is especially true in cases where an individual receives communication from the Internal Revenue Service.
Anyone who opens their mailbox and sees a letter from the IRS is likely to panic. Whether an individual chooses to throw the sealed envelope away or simply disregard its message, ignoring the IRS can end up costing an individual hundreds to thousands of dollars in fines and, in some cases, a whole lot more.
Annually, the IRS claims to send “millions of notices and letters to taxpayers for a variety of reasons,” some of which may be minor or even positive in nature. Even in cases where an individual knows that he or she failed to file or pay taxes or expects bad news, it’s important to open an IRS letter or notice as soon as possible and to contact the agency with any questions. This is especially true in cases where an individual believes that the IRS erred and an individual plans to dispute the issue in question.
In the event an individual takes no action to address or rectify the matter addressed in an IRS letter with a tax due and in need of tax debt relief, he or she may face fines, liens, garnishment of wages, property seizure and even criminal charges. In cases where an individual is in trouble with IRS or plans to contest an IRS matter, it’s a good idea to contact a tax law attorney. Therefore, knowing what to do if you receive an IRS letter or notice is important since your legal rights, the better the results will be.
For offers in compromise, the nature of the 656 form is an agreement between IRS and taxpayer to settle a tax debt amount that is less than what the taxpayer owed through an offer by the taxpayer, and then a negotiated settlement. The ultimate goal of this form is to settle an agreement that fits both parties’ interests. However, the IRS does not guarantee the approval of this application. However, there are little downsides of trying this process.
There are some pre-qualifications issues related to using this tax debt reduction technique by filing a IRS Offer in Compromise Program. To be eligible for this process, you must have filed all your income tax returns that are legally required, and make all required estimated tax payments for the current year. Along with these three requirements, you cannot apply for offer in compromise if you or your business is currently in an active bankruptcy proceeding (which the IRS would notify). You should go to IRS pre-qualifier test before you start the process. The link to the test is https://irs.treasury.gov/oic_pre_qualifier/.
The whole offer package for a IRS Offer in Compromise typically includes four components. Before you get started, you should gather information for this application since it requires a lot of detailed information and you have to be careful in how you answer the questions. The first component is Form 433-A (OIC) or Form 433-B (OIC). Form 433-A is designed for individual, sole proprietor, or disregarded single member LLC’s. On the other hand, Form 433-B is used if the business is a corporation, partnership, LLC classified as corporation, single member LLC taxed as a corporation or multiple-owner/member LLC is applying for relief. Sometimes both forms are needed with one submission. You need to provide detailed information about your financial situation to finish this form. Information is required for assets, liabilities, income and expenses. For example, for assets section, you may need bank statements and property appraisal’s. For liabilities, you may need credit report or loan agreements. You also will get a chance to explain any special financial situations in the form.
The next three components come next in the the Form 656, offer in compromise. In this form, you should provide your basic information like name, your SSN, address and EIN number if applicable. Then you need to specify what type of tax issue you have and which year(s) apply. Then you will calculate the offer amount. Two options will apply. You can use the lump sum method, which means an 20% initial payment and pay off the debt within 5 or less payments within 5 months or less. You can also pick periodic method which allows you pay off your debt within 6 to 24 months. I tend to pick the payment within 5 months variety since the settlement amount will be lower. The third component is the initial payment mentioned before. You can test your income on Form 656. If your income is lower than a certain threshold, the initial payment will be waived. Same thing happens with our last component, the $186 application fee.
To sum this up, when you have trouble paying all your tax debt, first go to website and finish the pre-qualifier test to get a feel for if this program is possible. Then you can finish Form 433-A (OIC) and/or Form 433-B. Then you can prepare Form 656. The last step will be submitting application fee and first initial payment if applicable.
If a IRS offer in compromise is not a possible solution, then you should look to see if other possibilities exist, such as penalty relief.
Reduce IRS Tax Penalties
The criteria to reduce IRS tax penalties is very difficult to meet, and if you do not produce the correct information to the IRS so they consider your case for penalty abatement, you are not going to have success.
Typically, you need to show reasonable cause to be excluded from most IRS tax penalties. If you think that you qualify for an IRS penalty abatement, you typically must show that there were factors outside of your control that caused you to not pay your tax debts, or file returns on time. Some of these reasons could include; a life-threatening illness, natural disaster, death of a spouse or close family member.
Another way to reduce your penalty can occur if you have no prior history of tax problems with the IRS. The IRS often will lessen certain penalties, such as failing to file a tax return or failing to pay taxes on time, for taxpayers with a clean history with them.
This penalty abatement to reduce IRS tax penalties is done by using a waiver called the first-time penalty abatement request. This first time exception is not typically indicated by the IRS on its penalty-related notices, but can be used by taxpayers, and we have utilized it many times. For instance, we recently met with a client whose husband passed away in 2006. Our client hadn’t filed her federal income tax or state income tax from 2006 to 2011. We were able to approach the IRS and get them to eliminate penalties for 2006 due to the first time exception, and the remaining years for reasonable cause.
Hint: If you apply for an abatement of the penalties charged and the IRS accepts your application to eliminate the tax penalties, it is helpful to pay the tax liability in full so the penalties do not re accrue.