How Does an Offer in Compromise With The IRS Work?
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.
How to Get an Offer in Compromise Approved
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 you make sure all your filings are up to date, you will also need to fulfill the following requirements:
- Form 433-A or 433-B must be submitted with all the supporting paperwork
- Form 656 must also be completed
- $186 nonrefundable fee
- Nonrefundable payments for each Form 656
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.
Navigating the Repayment Process
If you’re going for an offer letter approval, you need to understand what that entails, because it will impact your company’s 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 return owed during the year your letter 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 via a report that can be requested.