Disclaimer: We are not qualified tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.
Feeling overwhelmed by tax debt? You're not alone. Many believe the myth that it's possible to settle your tax debt for pennies on the dollar.
This introduction to the tax debt compromise program will clarify the process, helping you understand how you might qualify to significantly reduce your tax debt. Unlike the daunting narratives, there is a structured, attainable path to finding relief and moving towards financial freedom.
Let's explore how this program works, who qualifies, and how you can start the application process.
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How a Tax Debt Compromise Can Help You
The
Tax Debt Compromise is a federal government program that allows taxpayers with significant tax liability to negotiate a reduced payment amount. The program is open to taxpayers who meet certain eligibility requirements, including income requirements and how much is owed in past tax debts. The program is commonly known as the offer in compromise or OIC.
If you
qualify for the program, the IRS will work with you to develop a payment plan that fits your budget. You may be able to reduce your total payments by up to 85% of the total amount you owe. In addition, any interest and penalties that have accrued on your debt will be waived. The IRS is allowed to accept less money under the Effective Tax Administration (ETA) exception included in the OIC program. The IRS also has low income certification guidelines to follow.
Is the Tax Debt Compromise Legitimate?
Yes, this program is legitimate. The program allows taxpayers to negotiate a reduced payment amount for unpaid taxes. In order to be eligible for the program, taxpayers must demonstrate that they are unable to pay their IRS tax debts in full in addition to other eligibility requirements.
The debt compromise program can be a helpful way to resolve your tax liability, but it is important to understand the terms and conditions of the program before you apply. After you read through this blog and understand the requirements, contact the IRS as soon as possible to explore your options. Even if you do not qualify for the Offer in Compromise program, there are other options available.
Eligibility Requirements for the Program
In order to apply for the Offer in Compromise program, you must meet certain eligibility requirements.
Applicants must disclose their:
- ability to pay
- monthly income, including future income
- expenses
- asset equity
In addition, the IRS will look for the following information that you:
- owe federal taxes that you cannot pay in full
- have filed all required tax returns
- have made all required estimated tax payments for the current year, or have made all required federal income tax withholding from wages, salaries, and other sources
- not currently be in an open bankruptcy proceeding
If you have not met these requirements, your application will be returned.
Your application must be submitted on Form 433-A and Form 656(s) for individuals. Businesses and LLCs must submit Forms 433-B and 656(s).
Offer in Compromise (OIC) Upfront Costs
The Offer in Compromise program is not free. You must submit an application fee of $205. Form 656-B will indicate the total amount of your offer and if you intend to pay it in full or make installment payments. You will also have to enclose a check for 20% of your offer, unless you meet the low income guidelines. You must then complete paying off the offer within 24 months.
If a taxpayer embarks on installment agreements, you must pay the monthly installments until the tax authority reviews this offer. The OIC typically takes between 7 and 12 weeks to be approved or rejected. The goal is to pay off your IRS debts in five or fewer payments.
There are no guarantees that the IRS will accept the OIC unless you have special circumstances. If they do not, you are refunded the application fee.
The Acceptance Rate
In 2019, there were 20 million people owing back taxes. Of those, 54,225 submitted OICs. Only 17,890 OICs, or 30%, were approved. This means that the vast majority of people owing taxes do not apply for this program. Only tens of thousands apply for tax relief.
There are a number of reasons for this low application and acceptance rate. The IRS uses a set formula comparing the amount owed and months to left to meet the statute of limitations on collections. A minimum offer falling under this amount will not be approved. Taxpayers may also not have the financial reserves to pay the 20% downpayment. Enrolling in the OIC should not cause undue economic hardship.
While these numbers sound unattainable, don't give up. You may qualify and the IRS OIC program might suit your needs!
Why Do So Few Get an OIC?
Firstly, many of these applicants may be ineligible. They can have equity or future income which can help pay tax liabilities.
The government won't accept a tax settlement from a solvent taxpayer unless there are exceptional circumstances or other factors. Second, settling is potentially expensive. It could mean that taxpayers cannot afford the tax settlement.
The IRS considers reasonable collection possibilities, present and future financial status, living expenses, monthly income, and whether the monthly repayment of tax will cause financial hardship to you and your family.
Do I Qualify for the Program?
The IRS offers information on their website about the Offer In Compromise along with qualifying circumstances. You may also want to talk with qualified tax pros. If your IRS offer is rejected, you can submit Form 433 with additional information that may allow you to qualify.
If you do not qualify, you may be able to be accepted into a partial pay installment agreement.
How to Apply for the OIC
Submitting an Offer
For individuals, download and fill out Form 433-A and Form 656(s). This will indicate if you are eligible. Attach the application fee and the 20% downpayment and submit the offer. The IRS offer takes seven to twelve weeks to review and come to a decision. You need to make your monthly payments while your application is under review. Once a decision is reached, you continue to make your payments or seek other ways to pay your IRS tax debt remaining balance.
What Happens After You Apply for the Program?
After you apply for the Offer in Compromise program, the IRS will review your application and supporting documentation within a reasonable period of time. If they determine that you qualify for the program, they will send you an acceptance letter. The IRS does not make false promises or generally approve agreements.
Once you receive this letter, you will need to sign and return it to the IRS. After they receive your signed acceptance letter, they will send you a proposed tax settlement agreement. This agreement will outline the terms of your offer in compromise.
If you agree to the terms of the agreement, you will need to sign and return it to the IRS. Once they receive your signed agreement, they will send you a notice of acceptance which outlines the payment plan for your offer in compromise.
The Benefits of Enrolling in a Debt Compromise Program
The debt compromise program is a great way to reduce the amount of taxes you owe, as well as the penalties and interest associated with those taxes. The program is available to taxpayers who are unable to pay their entire tax bill at once.
Participating in the program can help you avoid wage garnishment, liens, and other legal actions from the IRS. In addition, enrolling in the program can also help you restore your financial stability and get back on track for long-term success.
If you're interested in learning more about the IRS tax debt program or want to see if you qualify, please contact an experienced tax professional today.
Benefits of IRS Offer in Compromise
A good OIC agreement reduces IRS tax debt or eliminates taxes owed. Decisions must be made on a case-by-case basis by the IRS's Taxpayer Advocate Service and IRS attorneys may be consulted on IRS Offer in Compromise programs. Keep in mind you do not have an attorney-client relationship with IRS lawyers.
If granted, tax relief may include the lien of an asset, such as a house or a vehicle. This lien is released once the tax debt is paid.
What are the Disadvantages of an OIC?
First, the application includes a huge amount of personal financial information that people may not want to reveal. Another disadvantage is how long it takes to complete an OIC application and the amount of upfront money you need to pay the IRS.
Because the Offer In Compromise application is based in part on the 10-year statute of limitation on tax collection, you may be better off not applying for an OIC. Before you make this decision, talk with a qualified tax attorney.
Does a Compromise Offer Affect Your Credit?
It can, but it usually doesn't. An offer in compromise is an agreement between you and the IRS that settles your tax debt for less than the full amount you owe. It's essentially a negotiated tax settlement between you and the IRS, and if it's approved, it will be reflected on your credit report as a paid collection account.
However, if you're approved for an offer in compromise, the IRS may not report the account to credit reporting agencies, thus not affecting your credit rating at all. An offer in compromise may definitely affect your credit score, but it usually doesn't have a major impact.
How to Get Started on Your Application?
The first step is to gather all of your financial documentation. This should include copies of your most recent federal tax returns, as well as proof of all your income (W2s, 1099s, bank statements, etc.) and your assets (bank statements, real estate appraisals, investment account values, etc.).
Once you have all of your paperwork together, you can begin drafting your offer on the OIC application. You'll need to provide a detailed description of your financial situation and explain why you cannot pay the full amount you owe. You should also include a proposed payment plan and an explanation of how you plan to pay off the debt in full.
If you're not sure how to complete the application or where to send it, you can contact the IRS directly for help. Read
Why You Should Consider Filing Your Taxes Early This Year for insights on the advantages of early submission.
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Here's a Tip
The taxpayer shouldn't only view the Offer in Compromise as their sole payment option. A taxpayer facing a tax burden has a number of options available from the IRS. Taxpayers can contest any balance they owe – even penalties – in a single case.
The best approach to making a tax settlement is to assess your tax situation personally and determine the best method for paying the smallest amount of debt. Focusing exclusively on the OIC could result in costly errors or leave your tax problem unresolved.
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