IRS Offer in Compromise to Settle Back Taxes
Details, Forms, Requirements and Guidelines to Resolve Tax Debt
Nov 5, 2009
It is easy to get frustrated when one realizes they owe money to the IRS and are not sure they can pay it back. This is even more so the case if a taxpayer has back taxes and their financial situation is grim. Contrary to popular belief, the IRS is willing to help out those who are having a difficult time paying their tax debt.
There are ways one can settle with the IRS, especially if their financial situation is dire. One of the ways to do this is by taking advantage of an IRS Offer In Compromise (OIC). This is an agreement between the taxpayer and the IRS stating that the debt will be settled for less than what is owed. This should be considered if a taxpayer is facing financial hardship. Realize that an OIC is rarely accepted, but under certain circumstances it will be approved.
What Eligibility Circumstances are Needed?
Eligibility for an OIC is based on three conditions or requirements below:
- Doubt The Debt Can Be Collected - This is referred to as "doubt as to collectibility." In other words, if the IRS feels they cannot collect the full amount, they may accept an OIC. They will need to come to a conclusion that this is their best chance to collect the most from the taxpayer.
- Doubt As To Assessment Liability - The IRS knows or feels there was an error in assessing the total amount owed by the taxpayer.
- Effective Tax Administration - This is when the IRS feels that collecting the full amount, or pursuing it, would cause financial hardship.
What Are Some Other Requirements?
- The taxpayer can not be currently going through bankruptcy
- All previous tax returns need to be filed
- All Proper documentation (IRS forms described below) must be submitted
What Forms Are Required?
Below are links to the required forms in order to file an OIC:
- IRS Form 656- IRS Offer In Compromise Booklet and Form
- IRS Form 656-A -Income Certification for an OIC
- IRS Form 433-A - Collection Information Statement
- IRS Form 433-B (if the taxpayer represents a business)
Can I Settle My Taxes With the IRS Right Away?
Not only does it take time to connect with the IRS on an Offer In Compromise, but not everybody is eligible as discussed above. This may be an interesting way to reduce tax liabilities, but the IRS does not usually feel the same way. Unless one can prove they are facing special circumstances, as discussed above, the IRS will not allow a tax reduction. Remember, they are the ones losing tax revenue with an OIC. This is why the IRS rarely accepts an OIC, in fact statistics show about 10% are accepted.
Who Can Help?
When considering an OIC it is best to work with a tax professional. A firm that has professionals from different backgrounds (CPAs, former IRS agents, Tax Attorneys) but also DOES NOT require a retainer fee or upfront fee. The industry has taken heat because of some unethical firms out there. If one realizes they are not eligible for an OIC, other tax settlements can be pursued to get into compliance with the Internal Revenue Service.
How Else Can A Taxpayer Settle?
One can settle in other ways by means of an IRS Installment Agreement (IRS standard payment plan), Partial Payment Installment Agreement, or by declaring bankruptcy (not recommended).
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