IRS Offer in Compromise: Settle Your Tax Debt for Less Than You Owe

When individuals and businesses do not have the ability to pay a tax debt, the offer in compromise is the IRS’s mechanism for reaching a settlement. It’s not universally approved and there are a lot of requirements that go into obtaining approval if you submit one, but the process is navigable with the right help and the right resources. It’s never necessary to deal with these things alone, so keep reading to learn how to get the help you need.

The IRS can accept an offer on one of three grounds. Most offers are based on the first one.

For most offers, the IRS adds up two things: the equity you have in your assets and the income you have left each month after allowed living expenses. How many months of that income it counts depends on how fast you’ll pay.

How your income, expenses and assets are documented has a big effect on that number, which is a large part of the work we do. Here’s more on how the IRS actually calculates a settlement amount.

The first required step to approval is making sure all your filings and payments on existing payment plans are up to date. If your tax paperwork is out of order, the IRS has no way of determining what your total tax obligations are, and without that, it can’t decide what percentage of that debt it expects to reasonably collect. While it’s not required, an optional first step that can help if you are working on ensuring all those filings are in order is hiring a tax professional. Once your filings are up to date, the offer also requires:

• Form 433-A (OIC) or Form 433-B (OIC) must be submitted with all the supporting paperwork
• Form 656 must also be completed
• $205 nonrefundable fee
• An initial payment with each Form 656: 20% of the offer for a lump sum, or the first monthly payment for a periodic offer

The key to approval is properly documenting the assets and expenses you have that prevent you from paying the entire tax debt. You’ll also have to select whether you are opting for a lump sum payment or installments over time. If you opt for installments, you will need to make nonrefundable tax payments while waiting to learn if your offer is approved or not. If it is not approved, those payments will at least reduce the outstanding debt. Your tax professional may also be able to negotiate an offer in compromise the IRS will approve if they reject the first one. There is an appeal process that needs to be initiated within 30 days of a rejection to keep the process open.

You also have to be current on estimated tax payments, and businesses with employees must have made their federal tax deposits for the current quarter and the two before it.

Offers get a lot of attention, but the IRS generally won’t accept one if you can pay the full balance through a payment plan or the equity in your assets. A rejected offer still costs the $205 fee and months of waiting. That’s why we run the numbers before anyone files, and why we often recommend something else.

If you’re going for an offer letter approval, you need to understand what that entails, because it will impact your finances throughout the year and probably into the next tax year. Depending on how you structure your recovery from your current financial situation, it could impact your finances for longer. Remember, if you have a tax lien, it won’t go away until you’ve satisfied the repayment agreement in full. If you’re making installment payments, this needs to be accounted for.

You also need to be prepared to give up any tax refund for a return assessed before the date your offer is accepted. That money will instead be applied toward your outstanding tax debts. It’s also important to realize certain information from the process will be available to the public for one year after your offer is accepted.

The offer in compromise is accepted by the IRS when the agency believes it represents the best chance of collecting the largest possible portion of the outstanding debt. The best way to determine what an appropriate offer will be is to work with a tax professional who understands the process and has a track record of getting approvals for clients. Without working with someone who has experience filing these letters for people with financial situations similar to yours, it’s hard to know what your chances of approval will look like. That means more than just finding a professional for advice, it means finding one whose service is built around people like you, whether it’s individuals, businesses, freelancers, or any other niche.

If you do not currently have an outstanding federal tax lien, one may be filed as part of the review and approval process while you negotiate an offer. The time the IRS has to collect is also extended during the review period, and your nonrefundable payments take the place of any pre-existing installment plan you might have been paying toward.

The IRS will not approve offers if you are currently going through bankruptcy proceedings because your tax debt might fall under the purview of the judge ordering your debt restructuring and discharge. Make sure you handle any bankruptcy proceedings before you begin the process of reaching a compromise with the agency.

The acceptance of the offer isn’t the end of things, it’s the beginning of your opportunity to get some resolution. That means you’ll need to be sure to comply with all the stages of the repayment plan to avoid invalidating it. You also need to realize that the federal tax lien will remain until the offer amount is paid in full, so be ready to accommodate it in future financial and tax planning.

The offer also comes with a five-year compliance period. If you don’t file and pay every tax that comes due in the five years after acceptance, the IRS can default the offer and go back to collecting what you originally owed. We help you stay on track for that stretch.

1. We find out whether an offer makes sense

   We file a power of attorney, pull your IRS transcripts, and run the same math the IRS uses before anything is filed, so you don’t pay a fee for an offer that won’t work.

2. We get you current

   We make sure every required return is filed and estimated payments are in place, since the IRS won’t consider an offer until you’re current.

3. We prepare and file the offer

   We prepare Form 656 and the financial statement with the documents that back up your income, expenses and assets, and choose the payment option that fits.

4. We negotiate and see it through

   We answer the IRS’s questions, negotiate the amount, file an appeal within 30 days if it’s rejected, and help you stay compliant after it’s accepted.

It’s never a good idea to approach complex financial decisions without sound advice from people who really understand the choices you’re weighing. That’s why tax professionals are there, to give you the resources to reach the best possible understanding with the IRS. If you need help negotiating an offer in compromise for the last tax year or for any preceding years, contact Anthem Tax Services today to find out how you can settle all your outstanding tax debt with one simple compromise.