If you’re struggling to settle a debt with the IRS, you may be able to take advantage of an “Offer in Compromise” (OIC). If you are eligible, this option could go a long way to easing the financial pressure because it allows you to finalize your tax liability for a mutually agreed amount – less than the actual debt owing. This may be particularly beneficial to individuals or families who are suffering with a serious illness or injury which impedes your ability to meet your financial obligations.

When considering whether you are eligible for the OIC the IRS takes many factors into account, such as your ability to pay the debt, your income and expenses, and your asset equity. While it may seem odd that the IRS would accept less than the full settlement of debt, in doing so they are able to recover the most that can be expected in a reasonable amount of time, and facilitate ongoing taxpayer voluntary compliance.

However, the OIC is not a path that should be taken lightly – in fact it should only be considered after all other payment options have been exhausted, and you are automatically ineligible if you’re under an open bankruptcy proceeding.

If, after weighing the options, you find yourself seeking an Offer in Compromise, there are some mandatory requirements that must be met for your offer to even be considered by the IRS. They include:

Submission of Form 433-A or 433-B plus all required supporting documentation as required;

Submission of Form 656;

Payment of a non-refundable application fee of $150; and

Remittance of a non-refundable initial payment towards the debt.

The IRS appreciates that certain taxpayers won’t be in a position to pay the application fee and/or initial payment, and those people may be eligible for relief from such payments provided they meet the Low Income Certification guidelines which, for the majority of the U.S., is a combined monthly income (for a family of three) of less than $3,815 [figure correct as at the time of article publication]. This limit is slightly higher in Hawaii and Alaska, and is adjusted for the size of the family unit.

After making your Offer in Compromise, the IRS will evaluate your particular circumstances and either accept or reject it. During the evaluation period it’s imperative that you continue to file all tax returns that you are legally obligated to file, make all estimated tax payments, and pay all federal tax deposits (if applicable) as and when they fall due. However, you are entitled to cease making payments on any existing approved installment agreements with the IRS. If your OIC is declined for any reason then your original installment agreement will be reinstated with no additional fee payable.

You should also understand that while your offer is being evaluated the IRS may, in some circumstances, file a Notice of Federal Tax Lien. This essentially means that your property is held as security for the tax debt. Any refunds, including interest, that you may be due to receive throughout the calendar year will be retained by the IRS and applied to your debt.

Payment Options

As part of your OIC you must select whether you wish to settle the offered amount in either (a) five monthly installments, or (b) monthly installments for a longer period of time. If you can manage it, option (a) will result in a lower minimum offer amount due to the methodology that the IRS prescribes to calculate the minimum offer. Another benefit is that, if approved, your IRS debt could be settled in just five short months.

Financial difficulties can be a distressing ordeal, but it really is in your best interest to make contact with the IRS to discuss your situation and try to resolve any issues, preferably earlier, rather than later. Voluntary, co-operative taxpayers are far more likely to benefit from any possible leniency or alternatives that may be available when compared with those who bury their head in the sand and hope that no one catches up with them. If you simply can’t meet your financial obligations, an OIC could be the solution; the IRS recovers more debt than they otherwise could, and your burden is lightened, enabling you to move on with your life.

Roy Fisher, CPA specializes in providing accounting and tax services to small business owners and professional practices in Houston, TX. For more information, go here: http://www.ledger-solutions.com

Roy Fisher, CPA specializes in providing accounting and tax services to small business owners and professional practices in Houston, TX. For more information, go here: http://www.ledger-solutions.com

Author Bio: Roy Fisher, CPA specializes in providing accounting and tax services to small business owners and professional practices in Houston, TX. For more information, go here: http://www.ledger-solutions.com

Category: Advice
Keywords: Accounting advice, CPA advice, business advisor