If you find yourself owing the IRS money, there are several ways to handle it. One unique way is to make an offer in compromise. An offer in compromise is a way to negotiate down the amount you have to pay. In rare instances, this has been as low as $1.
There are pros and cons to an offer in compromise. One obvious pro is that, if accepted, you will pay less than what you originally were taxed. Another pro is you can avoid a tax levy against you, protecting your bank account, wages, and physical property from seizure.
The cons can be costly. You must submit a deposit with your application and offer. If the IRS denies your offer, they will keep your deposit. Also, until an agreement is reached, you will still accrue interest and penalties. Here are some practical tips to help you make a good offer in compromise.
Make Sure Your Tax Filings are Current
The IRS has strict guidelines for making an offer in compromise. One part of that is making sure you have filed all past returns. They will automatically reject your application if you have outstanding tax returns from past years. In addition, you must also be up to date with tax withholdings for the current year.
Follow IRS Protocol
The IRS has detailed instructions on how to file an offer in compromise. There are specific forms that must be filled out. If it is individual tax debt, you must use Form 433-A. If it is for a business tax debt, you must file Form 433-B. These are only two of the many steps you must follow or your offer will be rejected.
There are other forms to fill out, and with them, application fees. Fees are non-refundable and do not count against any existing tax debt, so be certain you are filing properly.
Be Sure You Qualify
The IRS will consider an offer in compromise if it believes that paying the tax debt will put undue strain on your current financial situation. One good way to find this out is to use the online compromise pre-qualifier tool.
There are two types of Offer in Compromise. You can offer a lump sum, or offer to pay in periodic installments. You must submit the lump sum amount with your offer, and the first installment with the periodic payment offer.
Hire a Tax Attorney
There are many forms to file, laws to adhere to, and hearings to go to when settling a debt with the IRS. A tax attorney can help with all of these. They understand the laws, and in many cases have working relationships with IRS employees that can help the process along. The key is hiring the right attorney, one with experience in your particular situation.
The IRS will consider your ability to pay, your living expenses, your income, and your assets when deciding on your offer in compromise. Ultimately, the deciding factor is if the IRS determines your offer is equal to, or greater than, what they might ultimately collect from you before the statute of limitations expires.