Looking for a way to settle your tax debt for less than the full amount? An Offer in Compromise may be an option if you meet the IRS program’s qualifications.
If you have explored all options to pay your tax debt and paying back the full amount will create a financial hardship (or you believe that the tax liability is not correct), one last option to consider is submitting an offer in compromise. This IRS program allows taxpayers to settle their tax debts for less than the full amount. But the guidelines are very strict; anyone looking to take advantage of this program should consult with a qualified tax accountant before filing an offer.
What is an Offer in Compromise?
The Offer in Compromise program is an IRS program that allows qualified individuals to negotiate and settle their unpaid tax debt for less than the total owed to clear the debt. The purpose of the program is to create a compromise that is in the best interests of both the taxpayer and the government. The IRS will generally accept the offer if it believes that the amount is the most they can expect to recover within a reasonable period of time.
Am I eligible to submit an offer in compromise?
To participate in the Offer in Compromise program, there are certain requirements that need to be met. At a minimum, at least one of the following three conditions must be met to qualify for consideration of an Offer in Compromise settlement:
- Doubt as to Liability: The debtor can show reasonable doubt that the tax liability was assessed correctly.
- Doubt as to Collectibility: The debtor can show that the debt is likely uncollectable in full by the IRS under any circumstances.
- Effective Tax Administration: The debtor can demonstrate extenuating or special circumstances that the collection of the debt would “create an economic hardship or would be unfair and inequitable”.
Additional requirements include not being in an open bankruptcy proceeding, having filed all required federal tax returns, and being current on all required estimated tax payments. Although the IRS has a Pre-Qualifier tool available online: https://irs.treasury.gov/oic_pre_qualifier/, there are many more considerations that will affect your eligibility. Review your situation with a tax accountant to determine if this is the best option for your specific case.
Are there any costs involved with Offers in Compromise?
Yes. There is a nonrefundable application fee (currently $186) and you will be required to send in the initial payment (also nonrefundable). If you meet the Low Income Certification guidelines, the application fee and the initial payment will be waived. During the evaluation of your offer, you will not need to make any monthly installment payments if you are currently on an installment plan. Our firm can help complete the application package and answer questions regarding the initial payment.
How long does the process take?
The IRS will review your application to check if you have satisfied the minimum threshold requirements to be eligible to qualify for an Offer in Compromise. It usually takes the IRS about 3-6 weeks in order to decide if your offer is “processable” or not.
In about 4-6 weeks, you should receive a letter from an IRS Examiner introducing themselves and providing their contact information. After this, the Examiner will analyze your documents and audit your assets to determine the amount they believe they can reasonably recover from you. Depending on the complexity of your situation, this can take anywhere from 4 weeks to 8 months.
Finally, your proposed amount will either be accepted or rejected by the Examiner. If your Offer in Compromise is accepted, the process will likely take 6-8 months. If your Offer in Compromise is rejected, you can appeal the rejection to the IRS; this will likely extend the entire processing time to about 14-24 months.
Is it true that I can pay pennies on the dollar for what I owe?
Yes, it can be true if you qualify, but the guidelines are very strict. Don’t place too much confidence on the inflated claims of commercials that you’ve seen on the Internet or TV. Only individuals who have limited income and have exhausted their assets will receive this level of savings. In most cases, the potential savings (while still less than the full amount due) will turn out to be less than what the commercials proclaim.
The Offer in Compromise process involves many steps and requires careful consideration of many factors in order to determine the appropriate offer to the IRS. A skilled tax accountant will have dealt with the application process many times and will be able to help you determine the best payment offer and provide help if an appeal is needed. It truly pays to have a professional help you if you intend to take advantage of this IRS program. If you’re considering an Offer in Compromise for your tax situation, contact Sacco & Associates for assistance.