If you’re facing tax debt you can’t afford to pay, the situation might seem hopeless. Your heart sinks as your postal carrier rings your doorbell to obtain your signature on a certified letter.
It’s a collections letter from the IRS – and it’s not the first one you’ve received.
The thought of your unpaid tax debt may be forever in the back of your mind, causing stress, sleepness nights, and even guilt whenever you spend money.
Yet, your tax debt seems so huge, you feel you can’t pay it off. So you might spend compulsively on other things, trying to bury your stress. It’s a cycle of spending that can hurt your financial life in so many ways.
Fortunately, there is a way out.
Tax Debt Solutions
The IRS has introduced several programs designed to help taxpayers settle their tax debt, pay over time, and get back on a path to financial freedom. Whether you are a small business owner, 1099 contractor, or W-2 employee, the tax debt relief experts at Alleviate Tax are here to help you.
If you can’t pay your tax debt in full, you might be able to:
- File an extension
- Enter an installment agreement
- Request a partial pay installment agreement
- File for innocent spouse relief
- File for currently not collectible status
- File an offer-in-compromise
What is Offer in Compromise?
Formerly called the IRS Fresh Start program, the offer in compromise tax debt program provides taxpayers with a way to settle their federal tax debt for less than they owe. Your tax bill will be based on your means, or what you can afford to pay either in a lump sum or over time.
An IRS offer in compromise, OIC, is not necessarily the easiest path to tax debt relief. The IRS has only accepted roughly 36% of the offers in compromise received in recent years. But if you have reason to believe yours might be accepted, it pays to seek help from tax debt relief experts to improve your odds.
Should You File An Offer in Compromise?
When you file an offer in compromise, you’ll need to provide the IRS with proof that you can’t pay your tax debt in full or over time through an installment agreement. IRS installment agreements give taxpayers up to 72 months to pay off their tax debt.
If you can’t pay the full amount in that time without undue economic hardship, you might qualify for a partial pay installment agreement. You would see the balance of your tax debt forgiven after 72 months.
If none of the other tax debt solutions work for you, an offer in compromise might be the right tax debt solution.
How Does An Offer in Compromise Work?
To be eligible for an offer in compromise, you must:
- Not be in the midst of an open bankruptcy proceeding
- Be up-to-date on all tax filings
- Make any required estimated tax payments (for small business owners and 1099 contractors)
- Submit any federal tax deposits (for business owners)
Reasons the IRS May Accept Your Offer in Compromise
The IRS is likely to accept your offer in compromise if you meet certain criteria and if the amount you offer is equal to or more than the IRS believes it could collect (reasonable collection potential, or RCP) within a reasonable time frame.
Here are the reasons the IRS may accept your OIC:
Doubt as to Liability
If the IRS believes there could be an error in the amount you owe, or a dispute regarding the existence of debt, the agency may accept your offer.
Doubt as to Collectability
More frequently, the IRS will approve an OIC if your assets and income, along with future projected income, equal less than the tax debt. If you would not be able to pay the debt within a reasonable time frame, the IRS may accept your offer.
Effective Tax Administration
The IRS may accept your OIC if making the payment in full would cause undue economic hardship or be unfair or inequitable. This falls under the category of “effective tax administration.” The IRS doesn’t want to waste time and resources trying to collect debt from a taxpayer who has no means to pay.
For instance, if a taxpayer is disabled or has an illness or medical conditions that prevents them from earning future income, and paying their tax debt would exhaust their financial resources, the IRS can accept an OIC.
If a taxpayer has a fixed income, with few assets or equity, and uses that income each month caring for dependents with no other means of support, they might qualify.
If the taxpayer has assets, but cannot borrow against or sell those assets because it would create economic hardship, an OIC might apply.
Additionally, taxpayers must show an overall history of tax compliance, even if recent hardships have caused late tax filing or past due tax debt.
Reasons for OIC Rejections
An OIC might be rejected if the taxpayer has assets or equity to pay the tax debt. If the IRS believes it can collect the tax debt over time with an installment agreement payment plan, it will not accept an OIC.
You can use the IRS OIC pre-qualifier tool and enter basic information about your tax compliance, assets, income, and expenses, to see if you are likely to have your offer approved.
If a taxpayer has a history of non-compliance or tax avoidance, without extenuating circumstances such as illness, injury, disability, or natural disasters near their home, the OIC will most likely be rejected.
How to Fill Out Offer in Compromise
To file for an offer in compromise, first determine if you are filing for Doubt as to Liability, Doubt as to Collectability, or Effective Tax Administration. You can’t file for all three at the same time.
Complete Form 656, Offer In Compromise and Form 433-A, Collection Information Statement for Wage Earners and Self Employed Individuals. Business owners also need to complete Form 433-B. Submit the appropriate forms along with the $205 offer in compromise fee, unless you qualify for Low-Income Certification Guidelines.
Your application should also include 20% of your initial payment for a lump sum offer, or the first month’s payment for a periodic payment offer. If you make a periodic payment offer, you’ll need to pay off your tax debt with monthly payments. A lump sum offer allows you to pay off the tax debt in five payments or less.
When you apply for an offer in compromise, expect to provide supporting documentation, which may include balances in your bank accounts, debts, and equity in assets you hold. The IRS will use this information to determine your ability to pay. If you can sell or borrow against assets, the IRS isn’t likely to accept your offer unless selling or borrowing those assets would cause undue financial hardship.
How Alleviate Tax Can Help With Your Offer in Compromise
Alleviate Tax has resolved more than $37.25 million in tax debt through offers in compromise since 2018. We understand the intricacies of filing for an offer in compromise and have the relationships to negotiate on your behalf.
Taxpayers may find themselves waiting on the phone for hours to speak with an IRS agent. Our tax experts take on these tedious tasks for you, settling your debt with less stress.
If an offer in compromise isn’t the right tax debt solution for you, we can help stop wage garnishment, lift IRS tax levies and liens, and help you qualify for penalty abatement to reduce the total amount you owe.
Reach out to Alleviate Tax now to help with your back taxes and unpaid tax debt to secure a better financial future.
FAQs
How much does an offer in compromise cost?
The IRS charges an application fee of $205 for each offer in compromise Form 656 filed. This payment is non-refundable and will be applied to your tax debt whether your OIC is accepted or not. Additionally, you should include an amount equal to 20% of your total offer along with your application.
What percentage of offers in compromise are accepted?
The IRS has only accepted roughly 36% of all offers in compromise filed in recent years. To improve your odds of having your offer in compromise accepted, consider working with a tax debt relief service with proven success using this tax relief solution.
How much will the IRS usually settle for?
The IRS will usually settle your IRS tax debt if your offer is equal to or greater than what the IRS expects they could collect within a reasonable amount of time, taking into account your income, assets, equity, and expenses.
How hard is it to get an offer in compromise?
The IRS is likely to accept your offer in compromise if the amount you offer meets or exceeds what the IRS determines as the reasonable collection potential (RCP), or how much the agency believes it can collect within a reasonable time period.
