accountant calculating a tax debt

What Is an Offer in Compromise?

Tax debt looms over many U.S citizens. When you are having difficulty getting by, a tax debt can cause even more stress. It can be a major financial burden on top of everything else. If you are facing what may seem like an insurmountable tax burden, then you may still have options. An Offer in Compromise may be one such option.

Understanding an Offer in Compromise

An offer in compromise gives a taxpayer the option to settle an outstanding tax debt for less than the full amount that is owed. The truth of the matter is, however, that the criteria to qualify for an offer in compromise is very strict. The IRS will usually consider an offer in compromise if:

  • There is a legitimate dispute about the amount of debt owed.
  • Your assets and income fall below the amount of the tax debt and, therefore, the IRS has reason to believe the tax debt is not fully collectible. 
  • You have enough assets and income to satisfy the tax debt, but doing so would cause an undue hardship.

In other words, the IRS, when considering an offer in compromise will evaluate your:

  • Ability to pay
  • Income
  • Expenses
  • Asset equity

Before filing an offer in compromise with the IRS, be sure to check on your eligibility. You must be current on filing all required tax returns. Additionally, you may not have made any required estimated tax payment. You are also ineligible if you are currently in an open bankruptcy proceeding.

To submit an offer in compromise, you must complete Form 433-A if you are an individual or Form 433-B if you are a business. Include all required documentation specified by the form. Additionally, submit Form 656(s) along with a nonrefundable application fee of $205 and an initial payment, which is also non-refundable, for each Form 656 submitted.

Your offer must include a selection of payment options. There are two options: lump sum cash or periodic payment. Lump-sum cash payment means submitting an initial payment of 20 percent of the offer amount included in your application. Should your offer be accepted, any balance that remains on the tax debt will be paid off in five or fewer payments. 

With the periodic payment option, you will submit the initial payment with your application and continue to make monthly installment payments while the IRS reviews your offer. If your offer is accepted, you will continue to make the monthly installment payments until the outstanding debt is paid in full. In the event the IRS accepts your offer in compromise, regardless of the payment option you selected, you are required to comply with all terms of the agreement. Failure to comply with the agreement will grant the IRS the right to sue you for up to the original tax debt amount plus penalties and interest and minus any payments you have made.

San Francisco Tax Attorney

An offer in compromise is not for everyone. For those that qualify, however, it can provide a much-needed relief from an outstanding tax burden. Talk to the knowledgeable tax attorneys at Regal Tax & Law Group, P.C. about your options. Contact us today.