Should you find yourself with an income tax liability that you cannot afford to pay, an IRS offer compromise program is a settlement option that may be available to you. It allows you to settle your debt for less than the full amount owed. This option is attractive for those taxpayers who cannot pay their full tax liability or paying the full amount would cause significant financial hardship. There are several factors that the IRS considers when deciding whether to accept an IRS offer compromise, including: ability to pay, income, expenses, and asset equity.
How can you qualify for an IRS Offer in Compromise?
You can qualify for an IRS Offer in Compromise in the following three ways:
1. You can qualify for an IRS Offer in Compromise if you are facing financial hardship
2. You can qualify for an IRS Offer in Compromise if you are facing economic hardship
3. You can qualify for an IRS Offer in Compromise if you are facing a unique or irregular situation
BASIC REQUIREMENTS FOR AN OFFER IN COMPROMISE
There are eligibility requirements in order to have your offer in compromise considered. The taxpayer must be current with all filing and payment requirements. For example, if you have not filed your taxes for five years, you must file your returns before you can be considered. If you are in an open bankruptcy proceeding, you are not eligible.
If you’re interested in applying for an Offer in Compromise, the first step is to fill out the Preliminary Pre-Qualifier Form which you can find online. When filling out the form, you will be asked to provide information about yourself and your family. Additionally, you will also need to provide financial information about your assets and monthly expenses so that an Offer in Compromise eligibility can be calculated. The IRS has the IRS Offer Compromise Pre-Qualifier tool at (https://irs.treasury.gov/oic_pre_qualifier/) that allows you to confirm your eligibility to the program.
Filing an application for an IRS offer compromise is a formal process requiring several forms and fees. The Form 433-A (Individuals) and 443-B (Businesses) and all required documentation as specified by the forms, must be submitted, in order to be considered for an Offer in Compromise. Additionally, Form 656 for individual and business tax debt (corporation/partnership/LLC) must also be filed. Form 656 contains a section where you explain your circumstances and why you should be considered for an offer. While there are instructions to filling out these forms, it is recommended that you seek the advice of a tax professional to assist you. Typically, there is a nonrefundable application fee. There is also a nonrefundable initial payment for each Form 656 submitted. The nonrefundable fee and payments will be applied to your tax liability. It is important to note that penalties and interest will continue to accrue during the evaluation period. If you meet certain low-income guidelines, you do not have to pay the application fee or the initial payment and will not have to make monthly payments during the evaluation period. Accepting an offer in compromise is completely discretionary so be careful to complete the application with care. If your offer is rejected, you may appeal the rejection within 30 days.
