Can an Offer in Compromise Help Reduce Your Tax Debt?
An Offer in Compromise is an agreement between a taxpayer and the Internal Revenue Service (IRS) that the original amount owed will be reduced as long as the taxpayer pays the full amount under very specific terms.
Who is Eligible to Apply for an Offer in Compromise?
This might sound like every taxpayer’s solution, but it’s does not apply to everyone. An Offer in Compromise is typically granted to taxpayers who have a large tax debt. Even then, there are limitations. So even with a reduced amount, the balance can be quite substantial—even when it’s less than half of the full amount owed. That doesn’t mean that you can’t give it a try!
Applying for an Offer in Compromise is a process. It requires a thorough investigation of the applicant’s financial background. It needs to be determined whether or not this type of solution is the absolute best option for the taxpayer and that he or she is not just trying to take the easy way out.
What You Need to Do to Apply for an Offer in Compromise
First things first. You have to complete the application. Taxpayers who are interested in applying for the Offer in Compromise must fill out Form 656 and pay a $186 application fee that cannot be combined with any other payment that maybe due to the IRS. This is to avoid any confusion about which payment goes where.
If your application is accepted, there are two ways that an Offer in Compromise can be paid:
- Lump Sum Cash Offer
This is the payment plan that is mostly applied to accepted applications. According to the IRS, a lump sum cash offer is “an offer payable in 5 or fewer installments within 5 or fewer months after the offer is accepted.” With this option, the taxpayer needs to include the application fee along with the application form and a nonrefundable payment of 20% of the offer amount. There is a chance that the taxpayer’s application can still get rejected in which case, the money applied will be put toward the owed amount.
- Periodic Payment Offer
With this payment option, taxpayers have to pay their balance in 6 or more monthly installments within the 24 months after the offer is accepted. The taxpayer needs to submit the application form, the fee, and the first proposed installment—all which are nonrefundable.
About the Application Fee
The application fee may be waived based on one of the two requirements:
- The amount in question is based on any doubt as to a liability.
- If the taxpayer is an individual and not a business corporation or partnership. The applicant must also qualify for the low-income exception.