If you're facing outstanding tax debt that you cannot pay, you may want to consider looking into an Offer in Compromise from the IRS. Specifically, an Offer in Compromise is an option offered from the IRS to qualifying individuals that allows them to settle tax debt for less than what they actually owe.
Unfortunately, there seem to be a lot of misunderstandings about Offers in Compromise; many people falsely believe that these are seldom accepted by the IRS. In reality, it is estimated that the current acceptance rate is over 40%, with the average dollar amount of a settlement reaching more than $10,000.
If you're worried about your inability to pay tax debt, knowing the basic qualifications of an IRS Offer in Compromise and what to expect from the application process can be extremely helpful moving forward.
How to Know if You Qualify
Generally, there are three factors that are considered by the IRS when somebody applies for an Offer in Compromise. Most commonly, the IRS must have a belief that you will not be able to pay your tax debt off at any point in the near future. This means that your financial situation is probably not going to improve anytime soon and that the IRS would not likely be successful in forcing collections on you.
At the end of the day, the IRS needs to believe they are getting a fair deal — so if you have any potential to pay your debt at any point in the near future, you may not qualify.
You might also qualify for an Offer in Compromise if there is doubt as to your actual tax liability; if you have documentation proving that you owe less in taxes than the IRS believes to be true, or if an assessor has made a mistake on your reporting, you may be more likely to have an Offer in Compromise accepted by the IRS.
Finally, if paying your tax bill would create a significant financial hardship, you may also qualify for an Offer in Compromise. Of course, proving financial hardship can sometimes be a challenge.
In addition to all of these considerations, there are several other eligibility requirements that you must meet in order to qualify for an Offer in Compromise:
- You must pay the application fee
- You must have filed all of your required tax returns
- You cannot be going through a bankruptcy at the time of filing
- You must submit all required documentation
What to Expect From the Process
One of the most complicated aspects of going through the application process for an IRS Offer in Compromise is filling out and submitting all the required paperwork. There are several documents you may need to complete to even be considered for an Offer in Compromise, including:
- IRS Form 433-A - this form requires information on your assets, liabilities, expenses, and income to determine your Reasonable Collection Potential.
- IRS Form 433-B - this form needs to be filled out for businesses applying for an Offer in Compromise.
- IRS Form 656 - use this form to apply for an Offer in Compromise so long as there are no doubts as to your tax liability.
- IRS Form 656-L - use this form to apply if you are disputing your tax liability to the IRS.
In addition to completing these official forms as part of the application process, you will also need to provide some documentation, such as:
- health care statements
- bank and credit card statements
- investment information
- proof of living expenses
- car loan, mortgage, and similar loan statements
- copies of related tax returns
Working With a Tax Professional Can Help
As you can probably see, the process of determining your eligibility and applying for an Offer in Compromise with the IRS can be quite time consuming and complex. This is where it can be helpful to consult with a tax professional for assistance. A qualified and experienced tax professional will be able to assess your current tax situation and give you a better idea as to whether or not going through the Offer in Compromise application process is worth your time and efforts.
If so, he or she will also be able to assist you with the application process, ensuring that you're filling out the correct forms and that you submit all required documentation as well. This can increase your chances of reaching a successful offer with the IRS and take a lot of the stress and burden off your chest.
Even if you don't qualify for an Offer in Compromise, your tax professional may be able to assist you in figuring out other alternatives for making your tax payment more financially manageable for you. This might include options to work out a payment/installment program with the IRS, among other options.
The Bottom Line
Overall, getting an Offer in Compromise accepted by the IRS is nearly a 50/50 shot — but if you meet the eligibility requirements and take the time to correctly submit all paperwork and documentation, your chances of reaching an offer are high. And the best way to get the help you need in gathering this documentation and submitting this paperwork is to consult with an experienced tax professional, so reach out to yours today. If you don't already have a tax professional that you can turn to, schedule a consultation with one at your earliest convenience to get the ball rolling.