Offer in Compromise: How it Works

Offer in Compromise: How it Works

If you find yourself with a crushing amount of tax debt with no way to pay it off don’t panic. The IRS routinely eliminates tax debt for individuals in these situations by agreeing to an offer in compromise. What is an offer in a compromise?

An offer in compromise is an effective tool to negotiate down your tax debt when you are unable to pay the taxes owed to the IRS. Essentially you are admitting that you won’t be able to pay your back taxes and are instead offering the IRS a compromise so that they collect at least a portion of the money you owe.

In this article, we will look at the process for proposing an offer in compromise and how to tell if you qualify. Additionally, we’ll cover what to do if the IRS rejects your offer and if there are any downsides to using this tool.

How Does an Offer in Compromise Work?

The idea behind an offer in compromise is quite simple. The IRS wants to collect the money you owe, but you don’t have the money to pay them. Instead of spending countless man-hours trying to collect that money, the IRS agrees to let you pay back what you can afford to pay.

However, in practice, the process is quite complicated. It’s strongly recommended that you get contact us prior to submitting an application for an offer in compromise, as one wrong step could result in your offer being rejected.

The application process involves completing the following steps:

• Filling out Form 656 (offer in compromise)
• Completing Form 433-A (collection information statement for wage earners and self-employed individuals)
• Completing Form 433-B (collection information statement for business)
• Submitting a $205 application fee
• Submitting your initial offer payment (first payment of installment plan or 20% of lump-sum payment).

There are several intricacies throughout the application depending on your individual financial situation. If you are looking for a complete step-by-step guide on how to complete an offer in compromise check out the Form 656 Booklet.

How do I Qualify for an Offer in Compromise?

There are some fairly stringent guidelines for even being considered for an offer in compromise by the IRS. The IRS will only consider your application if you meet one of the following criteria:

• There is a doubt about the amount that you owe to the IRS.
• There is a doubt that the IRS can fully collect on the debt, meaning that your assets and income are less than the amount of back taxes that you owe.
• Paying the debt would cause undue economic hardship.

If that wasn’t enough, you won’t qualify if any of the following situations apply to you:

• You are in an open bankruptcy proceeding.
• You haven’t filed your federal tax returns.
• You have not made the required estimated tax payments.
• You are self-employed, have employees, and have not submitted your required federal tax deposits.

Additionally, even if you meet the above criteria, it doesn’t necessarily mean that your offer will be approved. The IRS also considers your:

• Ability to pay
• Income
• Expenses
• Assets

As you can see the IRS wants to make sure that you have been “playing by the rules” and are actually unable to pay prior to even considering your offer in compromise application.

What Financial Information Do I Have to Provide for an Offer in Compromise?

When submitting an offer in compromise, the IRS wants to get a complete picture of your entire financial situation. Therefore, they require you to provide the following information when submitting your offer in compromise:

• Income and expenses
• If you have declared bankruptcy
• If you are a beneficiary
• Contents of your investments, personal banking accounts, insurance policies, and available credit.
• Owned assets like real estate, vehicles, and even intangibles

It’s important to note that there are certain financial obligations that the IRS will not consider when looking at your financial situation. For example, they won’t consider college debt, voluntary retirement contributions, or payments on unsecured debt as expenses.

Why Will the IRS Reject an Offer in Compromise?

Even if you meet all the qualifications for an offer in compromise there is no guarantee that the IRS will approve. On average, about 40% of qualifying offers in compromise applications are approved.

Some common reasons the IRS rejects a qualified offer in compromise include:

• Your offer is too low or the IRS thinks that they can collect on the full amount. They will inform you how much they think you should pay if this happens.
• You failed to provide enough information to give a full picture of your financial situation.
• You’ve missed tax payments for the current year, proving that you are still a risk.
• You’ve been convicted of a serious crime.

It’s important to be very meticulous when completing your offer in compromise application. Failure to demonstrate the need for an offer in compromise could be detrimental to your personal finances.

What Can I Do If the IRS Rejects an Offer in Compromise?

If the IRS rejects your offer in compromise you have a few options. If you want to revise your original offer within 30 days of submitting your application, you can simply send a letter increasing the amount of money. If 30 days have passed since submitting, you will need to submit a new Form 656 to revise your offer.

If you receive a rejection letter and feel that your offer was sufficient, then you can file a Form 13711 within 30 days of receiving the rejection letter. This will allow you to identify which parts of the rejection you are disputing and why you are doing so.

Are There Any Downsides to Applying for an Offer in Compromise?

There are a few downsides to applying for an offer in compromise. So, it’s important to weigh the pros and cons before starting the process.

The most obvious downside is the time it takes to complete the paperwork and process. All said and done, the entire offer in compromise process typically takes about a year.

Another important consideration is that the offer in compromise isn’t actually finalized until 5 years after the agreement has been made. You need to stay compliant with your taxes during this time period or the IRS can void the agreement and you will still owe the full amount.

Finally, the 10-year statute of limitations is put on hold during the offer in compromise process. Typically, the IRS is required to collect back taxes within 10 years. However, if you apply for an offer in compromise, then the time limit is put on hold.

For example, if you apply for an offer in compromise with five years remaining on the statute and the IRS takes a year to reject your offer, they will still have five years to collect.

Should I Get Help Applying for an Offer in Compromise?

The application process for an offer in compromise is extremely litigious and detailed. It’s not advised that you embark on the process without professional help.

At IRS Shield, we can help you prepare your application and walk you through all of your options. That way you have the knowledge you need to submit your application with confidence and have the best shot at getting your offer in compromise approved.