Owing the IRS for back taxes and not having any substantial amount to pay can be totally overwhelming. Fortunately, there is good news because the IRS offers a program called Offer in Compromise, wherein this gives way to the settlement of your tax debt for less than you owe. This is designed to provide relief to those taxpayers who are experiencing undue hardship when asked to pay their full tax debt. However, the filing process can be tricky, and there is a certain way of doing things. The following article takes you step by step, from the status of eligibility to the acceptance or appeal of the IRS’s decision.
When Should You Consider Filing an Offer in Compromise?
Not everyone qualifies for an Offer in Compromise, and there are some important boundaries on when this option is appropriate. You will generally want to consider filing an OIC if you meet the following criteria:
- Insufficient to Pay in Full: You are unable to pay the full amount of your tax debt because payment would create financial hardship.
- You have exhausted all your avenues of options, including an installment agreement or working with a wage garnishment lawyer to negotiate smaller payments.
- You lack assets and adequate income, and the IRS has determined such based on your financial statements.
The Offer in Compromise is usually for those that owe money from taxes that are really unable to pay it back full. If, in a case, you experience financial hardships from paying the full amount, you should consider filing for an OIC.
Step 1: Know Whether You Are Eligible for an Offer in Compromise
Before you go through the paperwork and hassle of filing an OIC, it pays to check whether you qualify for the same in the first place. IRS takes a number of factors into consideration that determine your eligibility for this:
- Ability to Pay: The IRS cross-checks one’s income and assets against the tax debt.
- Income vs. Expenses: Your income on a monthly basis versus your living expenses will help the IRS estimate what you can afford to pay.
- Equity in Assets: If you have considerable equity in assets such as real estate, the IRS might expect you to use such assets to pay against your tax debt before accepting an OIC.
The IRS has an Offer in Compromise Pre-Qualifier Tool on its website, which can be used to get a general idea of whether or not you may qualify. This will allow one to see if they will likely qualify before going into the formal process.
Step 2: Gather Financial Documents
Once you feel that you might qualify, your second step is to gather all the financial documents you will need. These documents will serve to unequivocally demonstrate your financial position to the IRS. These main documents are going to include:
- Income Statements: Paystubs of recent dates, Social Security statements, or any other forms of recent income documentation.
- Bank Statements: Statements of the most recent of date of checking and savings.
- Investment Accounts: Statements representing stocks, bonds, or other investments you have.
- Property and Asset Records: Real estate, automobiles, and other valuable property.
- Living Expenses: Tapes or bills from rent, utilities, medical expenses, groceries, and other needful living expenses.
These documents will enable the IRS to review your paying capacity and arrive at a decision whether your OIC is likely to be accepted.
Step 3: Filling out the IRS Forms for an Offer in Compromise
Now that you have all your financial documents in order, the next step will be to fill out the various IRS forms. These forms allow you the ability to officially make your offer and give an account of your financial details. The main forms include:
- Form 656: This is the official Offer in Compromise form on which you state how much you are offering as a compromise for your tax debt.
- Form 433-A (OIC): It’s for individuals and actually gives fairly in-depth information about your income, your assets, and expenses. This will be somewhat time-consuming to fill out, as this is what the IRS will utilize for their determination for paying capability.
- Form 433-B (OIC): As a business owner, this form covers the same areas as 433-A, but it pertains to your business.
The first step will be to carefully read the instructions and double-check your forms for completeness and accuracy. This would help you avoid a lot of problems, such as delays or an offer rejection.
Step 4: Lodging Your Offer and Payment of Application Fee
Having filled out the forms, you are now ready to lodge your offer together with your application fee payment and your initial payment. Here’s what you need to know:
- Application Fee: OIC application fee is $205, but that is waived if you satisfy the low-income threshold requirements.
- Payment to be made at the time of application: IRS requires either upfront payment of the amount which you are offering in compromise or a partial payment depending upon the type of payment option you have chosen to make:
- Lump Sum Offer: You are needed to submit 20% of the total offer amount submitted with your application. You would need to pay the offered amount in five or fewer payments if the IRS accepts your offer.
- Periodic Payment Offer: You will be making your first payment with the application and then continue to make monthly payments while the IRS is considering your offer.
You’ll want to mail all forms, one payment, and supporting documentation to the appropriate IRS address as specified within the instructions. For added protection, you may want to consider sending these in via certified mail for protection.
Step 5: Wait for Review from IRS and Respond to Requests
With your offer in, the IRS will begin processing your case. It may take several months for them to do so, during which period they may request additional documentation or clarification concerning your finances. Always ensure you promptly answer any inquiries to avoid further delays.
While your Offer in Compromise is pending, the IRS generally stops collection activity, including wage garnishment or levies. Interest on your outstanding tax debt will accrue during the time it takes the IRS to evaluate your offer and until they accept it.
Step 6: Accepting or Appealing the IRS Decision
After the IRS has completed the processing of your offer, they either accept, reject, or counter your offer. The following is what can be done in each situation:
- Accepted Offer: If the IRS accepts your offer, this is cause for celebration! You will have to make the payments that you promised in your offer. When you have completed the payments, your tax debt will be regarded as settled, and all liens or other collection activities will be lifted.
- Rejected Offer: If your offer is rejected, there is nothing to get alarmed about. You can appeal your decision within 30 days after filing Form 13711, Request for Appeal of Offer in Compromise, and a tax professional or wage garnishment lawyer will assist you through the process.
- Counter Offer: Sometimes, the IRS will counter an offer against your offered amount. You may accept that new offer or you can negotiate to settle which is mutual for both parties.
It’s good on your behalf to be involved during this review process so as to be better equipped in working with the IRS in case problems do arise.
Conclusion
Filing an Offer in Compromise is not easy, but it offers a great opportunity to settle your tax debt for less than what you owe. If you carefully follow each of the steps in this roadmap to success—determining whether you qualify, pulling together financial documents, filling out IRS forms, and being responsive during the review process—you will be on your way to making it happen. Wage garnishment lawyer consultation or tax professional can make all the difference if you are skeptical about part of the process or need assistance in dealing with wage garnishment.