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Have you been saddled with an unexpected tax bill? Does it have you stressed out, fearful that Uncle Sam is going to show up at your door and cart away all your possessions? Did you know the IRS offers various solutions to assist tax payers with paying their tax balances? One solution is an Offer in Compromise.
An Offer In Compromise (OIC) is a settlement of your tax bill for an amount less than what’s owed. To qualify all tax returns must have been filed, any required estimated tax payments and any federal tax deposits (businesses) must have been made.
Reasons for the Offer
The IRS lists three grounds on which they may accept an OIC.
- “The IRS can accept a compromise if there’s doubt as to liability. A compromise meets this only when there’s a genuine dispute as to the existence or amount of the correct tax debt under the law.”**
- “The IRS can accept a compromise if there’s doubt that the amount owed is fully collectible. Doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.”**
- “The IRS can accept a compromise based on effective tax administration. An offer may be accepted based on effective tax administration when there’s no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.”**
The first step to start the negotiation process is to determine if you qualify to make an offer. Using the IRS Pre-qualifier Tool, you will answer asset related questions. The amount of equity in homes and cars, cash value insurance policies and retirement funds are counted as assets that the IRS deems as possible means to pay your tax balance. To see if you qualify now click here.
Completing The Application
Once you have determined your eligibility, you will need to complete form 656 and the accompanying form 433. Form 433-A and 433-B are financial forms in which you will disclose the amount of your total value in assets. You can find detailed instructions and frequently asked questions of how the process works in the form 656 Booklet. Along with your financial forms you will are required to submit documents such as pay stubs, bank statements, copies of bills, mortgage statements, investment related information, etc.
Money Talk
Application Fee
There is a $186 application fee that must be submitted at the time of submission. In addition to the application fee all applicants must submit an initial payment. The payment amount is determined based on the payment option you choose. If you are a low-income individual and meet certification guidelines you do not have to pay the application fee or submit an initial payment.
Payment Options
The IRS offers two payment options.
Lump Sum Cash Offer: The IRS defines a lump sum payment as “an offer payable in 5 or fewer installments within 5 or fewer months after the offer is accepted”.** If you choose this method, you must submit an initial payment of 20% of the offer made.
Periodic Payment Offer: The IRS defines a periodic payment as “payable in 6 or more monthly installments and within 24 months after the offer is accepted”.** If you choose this method, you must submit the initial installment payment with the application.
Additional Info.
- The initial payment is non-refundable and will not be returned if the offer is not accepted. If your offer is not accepted these funds will be applied against your tax balance.
- If you do not submit the required documents with your completed form 656 the IRS may reject your application.
- You may authorize a third-party such as Enrolled Agent, CPA or Attorney to represent you.
- The IRS may contact you during the application process to request additional information. Promptly send any requested documents paying careful attention to dates and deadlines for submission.
- If you are in an open bankruptcy you are not eligible for an OIC.
Disclaimer: The information included in this post is not intended to be used as or considered tax advice. This content is for informational purposes only. The sources used as basis for this post can be found on the IRS website. For questions specific to your tax situation contact your local tax professional, CPA or Attorney.
Additional tax tips: Independent Contractor
**Source Documents**
US Dept of Treasury. Internal Revenue Service. https://www.irs.gov/pub/irs-pdf/f656b.pdf
US Dept of Treasury. IRS. Revised March 1, 2018 https://www.irs.gov/taxtopics/tc204
Do you have a general tax question? Ask in the comments.
Hey Ms. Tee! Very informative post. I have a friend and a few clients I can think of that I’m going to refer to this post today. Thanks so much for taking the time to provide information that many may not know about. Have a great day!
Thank you and yes, please share. A lot of people are not aware or misinformed.