What is an Offer in Compromise and How Does it Work?

If you owe more than $10,000 in back taxes to the Internal Revenue Service (IRS) you may be eligible to settle for less than the full amount owed. A so-called "offer in compromise" is a legal agreement between a taxpayer and the IRS that settles the an outstanding tax debt for a negotiated payment.

The idea behind an offer in compromise is that it allows taxpayers who truly cannot afford to pay their full tax liability to settle their debt for less. This can provide much-needed relief for individuals and businesses struggling with unmanageable tax bills.

How Does an Offer in Compromise Work?

The offer in compromise process typically involves the following steps:

1. Determine Eligibility: The first step is to determine if you are eligible to submit an offer in compromise. The IRS has strict criteria that must be met, including: You must have filed all required tax returns. You must be current on all estimated tax payments and federal tax deposits. You cannot be in an open bankruptcy proceeding. You must demonstrate that you cannot pay the full amount you owe based on your current financial situation.
2. Calculate the Offer Amount: The next step is to calculate the amount you can afford to offer the IRS. This is based on your ability to pay, which the IRS will assess by reviewing your income, assets, expenses, and overall financial situation.
3. Submit the Offer: Once you have determined the offer amount, you will need to submit IRS Form 656, Offer in Compromise, along with supporting financial documentation. This form outlines the details of your offer and provides the IRS with the information they need to evaluate it.
4. IRS Review and Consideration: The IRS will review your offer and supporting materials to determine if your proposed settlement amount is reasonable based on your financial situation. This process can take several months.
5. Acceptance or Rejection: If the IRS accepts your offer, you will be required to make the agreed-upon payments, and the IRS will release any liens they have placed on your property. If the IRS rejects your offer, you will be responsible for paying the full outstanding tax liability.

Benefits of an Offer in Compromise

The primary benefit of an offer in compromise is that it can provide significant tax relief for those who truly cannot afford to pay their full tax bill. By settling for a lesser amount, taxpayers can finally resolve their tax debt and get a fresh start.

Additionally, an accepted offer in compromise can remove any tax liens the IRS has placed on the taxpayer's property, which can improve their credit score and make it easier to secure financing or obtain certain types of loans.

It's important to note that the offer in compromise is not the only option for those struggling with tax debt. Taxpayers may also be eligible for other IRS payment plans or hardship-based programs. However, for those who qualify, an offer in compromise can be an effective way to achieve a manageable resolution to their tax liabilities.

In conclusion, an offer in compromise is a valuable tool for taxpayers who are unable to pay their full tax debt. By understanding the eligibility requirements, including the typical minimum tax debt of $10,000, as well as the process and potential benefits, eligible individuals and businesses can take the first step toward resolving their tax issues and moving forward with a clean slate.