If you face a substantial tax debt without the means to pay it off, even in a few years’ worths of monthly installments, you may want to consider an offer in compromise (OIC). An offer in compromise is a process through which you can negotiate a lower total tax debt with the IRS. However, it isn’t guaranteed. There are strict eligibility rules and qualifications. A big part of qualifying involves being completely upfront about your financial situation, existing assets, real property, investments, vehicles, and sources of income. Ultimately, the IRS wants to ensure that you are paying just about as much as you can afford to without facing financial hardship before it will consider an offer in compromise.
What Is an Offer in Compromise?
An offer in compromise is one of the multiple payment options the IRS offers to taxpayers. It has tighter eligibility rules and a longer list of qualifications than the IRS’ other payment plans. Creating an offer in compromise requires two forms: Form 656 and Form 433-A (OIC) (or Form 433-B (OIC) for businesses). The former is the offer in compromise itself, alongside instructions on filling and filing it. At the same time, the latter is the collection Information Statement (CIS), consisting of the financial information the IRS requires to determine your eligibility.
The IRS verifies the information provided on a CIS and cross-references it with information returns obtained by banks and businesses before its deliberation. Once you’ve finished filling out the information needed, you must send it to the IRS alongside a non-refundable application fee of $205 and the initial payment of your proposed offer. The IRS expects you to calculate what you can offer to pay within a reasonable period and requires you to make the first payment alongside your application.
Even if it rejects your offer, the first payment sent alongside the application is non-refundable. Because it can take multiple weeks to deliberate an offer because tax debt grows through penalties and interest, and you have to send in an initial payment with each new offer (alongside the $205 fee). It’s generally a good idea to be sure about your offer in compromise before you go ahead and make one.
IRS Tax Resolution and Collection Actions
Why work so hard to settle your debt with the IRS? Because if you do not, the IRS may enforce collection actions against you and your tax account. IRS collection actions include federal tax liens and assets, property, and wage levies. A federal tax lien is a public notice informing creditors of the IRS’s superior claim on everything you own, freezing your ability to satisfy other debts or seek financing until you settle your debt with the government. In the past, this process would also leave a black mark on your credit score equivalent to bankruptcy – this has since changed, and credit agencies no longer report tax liens.
On the other hand, Levies are a more direct form of action. They involve taking what you own and selling it to satisfy your tax debt. While the IRS won’t kick you out of the family home, they can come to collect your car or all but empty your bank account. They can contact your employer to claim a portion of every paycheck until you pay your debt if you are employed. Liens and levies can be harsh. Payment plans, such as an offer in compromise, can avoid them. Furthermore, specific payment plans can even lead the IRS to release a lien or reverse a recent levy before your property is sold if the circumstances permit it.
Choosing a Payment Plan
In addition to an offer of compromise, the IRS accepts payments in a few different ways:
- Direct payment involves satisfying your tax debt today with a single charge.
- A short-term payment plan is any payment plan that satisfies your debt within 180 days via multiple lump sums (the first one should usually be worth 20 percent of your total debt).
- A long-term payment plan is an installment agreement consisting of monthly payments made to the IRS over a set period (usually 72 months).
- Streamlined installment agreements are the quickest to set up but may require that you authorize the IRS to withdraw money automatically, and they need that your tax debt totals no more than $50,000.
- Non-streamlined installment agreements are still simple and may not require an in-depth look at your finances, but you may be subject to a lien determination and resulting tax lien.
- Verified financial installment agreements are for taxpayers with substantial tax debt, requiring a thorough investigation of your finances to determine the viability of a monthly payment plan.
- Suppose a tax debt has been hanging over your head for multiple years. In that case, you may be able to enter into a partial payment installment agreement, where you make monthly payments for as long as the tax debt remains valid (based on your Collection Statute Expiration Date).
- Direct Debit installment agreements allow the IRS to withdraw money automatically each month, reducing the likelihood of defaults and providing certain perks, such as potentially lifting a lien.
- Payroll deduction installment agreements take money out of your paycheck rather than your bank account if this works better for you.
What If You Don’t Qualify for an Offer in Compromise?
If your offer of compromise was rejected, consider consulting a tax professional about drafting a better proposal or picking a better payment plan that suits your circumstances. The beauty of an offer in compromise lets you settle your tax debt for less than you owe. The caveat is that very few people qualify for an offer in compromise. While the IRS has been throwing taxpayers a bone by relaxing the requirements for an offer in compromise, it remains in the spirit and practice the last resort for taxpayers who lack the financial means to pay their total tax debt within a reasonable period.
That doesn’t mean you do not qualify for an offer in compromise. Depending on what you own and what you owe, you may be able to be eligible for an offer in compromise. You may still be able to get a reduced total tax debt via a partial payment plan if your debt is about to expire, or you could create a more realistic offer with the help of an experienced tax professional. At Rush Tax Resolution, we can help you quickly figure out the best way to deal with your tax debt.