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Offers In Compromise

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Every year that a person does not pay the IRS the taxes owed from the previous year, penalties and interest will accrue on the unpaid balance. After many years, this person can likely end up with an unmanageable amount of debt to the IRS. The IRS may seek them out personally, implementing an audit, demanding payment and threatening jail time if it is not paid. Without some sort of intervention, the amount owed will continue to compound every year. One way out of this situation for taxpayers is through what is called an Offer in Compromise.

An Offer in Compromise is an agreement between a taxpayer and the IRS to settle a tax liability by paying less than the full amount owed. Through this plan, the taxpayer can pay off some of the money from penalties and interest that had been added to their original bill. The goal of the Offer in Compromise is for the IRS to collect what is reasonable at the earliest possible time and at the least cost to them.

A Offer in Compromise may be accepted by the IRS for one of three reasons: If there is doubt that the amount the person owes can ever be paid back in full; if there is doubt that the amount of tax owed is correct (here the taxpayer must explain why they believe they do not actually owe the tax); or if the taxpayer believes that, due to certain circumstances, it would be unfair for the IRS to require full payment.

The criteria for an Offer in Compromise focuses on the taxpayer's ability to pay. The IRS considers what the taxpayer's ability to pay the tax debt over a five-year period is. They may forgive some of the tax debt if the ability to pay is less than what is owed. The debt can then be reduced to a level that the person is able to start paying. In order to qualify, the IRS will look at a person's expenses in one month, including housing costs, medical expenses, alimony and child support, food, clothing, and transportation costs. If the person's total expenses are greater than their monthly after-tax income, they should qualify for the program.

Certain conditions must be met in order for one to even be considered for an Offer in Compromise. The first is Doubt as to Liability, or that the debtor is able to show reasons for doubt that the tax liability that has been assessed is correct. The next condition is Doubt as to Collectibility, meaning the debtor is able to show that the debt is most likely not collectable in its full form by the IRS under any circumstances. Another condition is the Effective Tax Administration, that the debtor does not contest liability or collectibility, but they are able to show extenuating or special circumstances so that to collect the debt would be unfair and inequitable because it could create an economic hardship.

If the Offer in Compromise is accepted, the person may pay with cash, a short-term deferred payment plan, or a long-term deferred payment plan. The taxpayer must remain in compliance with all filing and payment obligations and not incur any new tax debt for five years or until the offer amount is paid, whichever is longer.

It's important to be aware of different scams associated with the Offer in Compromise, as many promoters' claim to have the ability to settle debts for pennies on the dollar. Many companies would charge high fees to consumers who were possibly not eligible for the program, and installment payments and all other payment means would have to be exhausted. One way to avoid this is by checking with the Better Business Bureau before one agrees to contract any firm to resolve their tax problems. Your best course of action would be to consult with a licensed tax attorney to get you on the path to tax recovery.