Offer in compromise : What , When & How ?

offer in compromise

The IRS Offer in Compromise is a settlement scheme that a taxpayer can opt to settle IRS tax debt. This step is specially needed if if you are pretty much broke and absolutely not in a position to pay the outstanding federal tax.So, if an Offer in Compromise is applied for in a prescribed form and IRS finally approves it, you can to settle our tax debt for less than what you owe. That answer what is Offer in Compromise.

When should you apply for Offer in Compromise?

But when is the Offer in Compromise likely to be approved is a question IRS determine after rigorously examine your case. Roughly 60% applications for an offer in compromises are rejected. Three most important criteria for IRS agreeing to accept settlement offers under Offer in Compromise are :

  1. Tax collection from you on account of financial position is doubtful in their view
  2. IRS doubts its own tax bill either because of some apparent legal reason or new documents produced before it .
  3. IRS believes paying tax by you will create a great hardship to you

Therefore, if your submission and documentary evidence help IRS to find out the answers to aforesaid basic questions in your favour , the chances of acceptance of the Offer in Compromise is quite high.  But before you submit, give a thoughtful consideration to following points :

  • Am I prepared for the long drawn process of compromise  ? Offer in Compromise is a time-consuming process and expect minimum six months to a year for the IRS to complete an initial investigation of the compromise.
  • Is it right time to submit an offer in compromise?  Consider this, the IRS gets ten years to collect a tax liability from you .However, if you submit an offer in compromise, the time limit to collect will extend accordingly. so one should be careful as far timing of the offer in compromise is concerned
  • Have you tried other options available to you?  Bankruptcy, completed in six months, can eliminate taxes, and requires no negotiation with the IRS. Then, have you thought of a program known as “uncollectible,” where IRS write-off debts that cannot be collected usually where the time frame to collect is going to be over.

How to apply for an offer in compromise?

Basically, you need do the two important steps. Fill the prescribed form and pay the fee of $186 initial monthly tax debt.

(i) You must fill out and submit IRS Form 656-B which includes

  1. Form 656
  2. Form 433-A (OIC) which is for individuals, and
  3. Form 433-B (OIC) which is for businesses.

(ii)Pay an application fee of $186 fee as well as a payment of your tax debt.However, if you meet the Low-Income Certification guidelines of the IRS, you will not need to pay the $186 application fee or make an initial monthly payment until the IRS accepts your offer.

Filing for an Offer In Compromise is time-consuming and confusing, and you should get help from a licensed tax professional.

Sure shot reasons for rejection of Offer in Compromise

IRS may reject your application for Offer in Compromise in following conditions :

  1. You have filed bankruptcy
  2. you have not filed federal tax returns you are required to file under the law.
  3. Applied for Offer in Compromise with statutory application fee unless you qualify as low income
  4. Did not attached /submit the required documents.
  5. If you run a business, you did not make all required federal deposits for the current quarter. If you are a sole proprietor or partner you did not do estimated tax payments

Appeal against Rejection of Offer in Compromise

If the IRS is unwilling to accept the amount offered, you then have the right to  file an appeal within 30 days from the date of the rejection letter . This appeal usually takes another six months to a year and if you can reach an agreement with appeals, the IRS will allow you to pay the settlement over up to two years.

If you request an appeal and are not able to reach an agreement with the Officer of Appeals, you may be eligible for consideration of post-Appeals mediation under Rev. Proc. 2014-63.

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