If you owe a substantial amount of taxes to the IRS, you may be unable to pay them or it may cause a significant financial hardship. You have the option to request an Offer in Compromise to reduce the amount you’re required to pay back. This solution won’t work for everyone, but it can be a viable choice in certain situations. Before you or your accountant submits an Offer in Compromise, you should understand how it works.
Are You Eligible for an Offer in Compromise?
You must meet the qualifications to be approved for the offer. First of all, it won’t even be considered unless you’re current with your filing requirements and payments. You won’t qualify if you are in the midst of a proceeding for bankruptcy.
You can go online to the IRS website and input information into the Offer in Compromise pre-qualifier. You’ll need to answer some basic questions to determine if you might qualify for an offer. However, this step doesn’t guarantee that your offer will be approved.
Estimating the Taxpayer’s Ability to Pay
The IRS will only approve an Offer in Compromise if it thinks it cannot collect the full amount owed. When you submit an offer for how much you can pay, it must be equal to what the IRS estimates it can collect through its various options. This includes liquidating assets and the amount of income you will earn in the future.
Your income which may be used for this calculation will be the amount you take home minus your living expenses. However, your living expenses may be calculated differently by the IRS than what you would include. The IRS allows a certain amount for housing, transportation and food and clothing, which may vary from what you actually spend.
The amount of income calculated will be multiplied by twelve. That amount will be added to the sale of assets which are valued at about 80 percent of the actual value to determine how much you must offer. You can hire a tax preparer to help you with these calculations to ensure you submit the correct Offer in Compromise the first time.
Steps to Submitting an Offer in Compromise
You can find the detailed steps to submitting an offer to the IRS in the Offer in Compromise Booklet, Form 656. However, this is a complicated process best handled by a tax accountant. Some of the steps involved include the following:
It’s also important to note that if your offer is rejected or sent back, the funds will be kept to pay on your tax debt. If you submit a second Offer in Compromise, you’ll need to provide additional funds.
How Can You Pay the Amount in an Offer?
You must also determine how you will pay the amount offered if the IRS accepts your Offer in Compromise. You can make a lump sum cash offer, which means you must pay the full amount approved in five payments or less. You must submit 20 percent of that amount when you place the offer.
You can also request a periodic payment option, which gives you six or more payments to pay the balance. You have up to 24 months to pay the balance in full. For this option, you’ll need to submit the first payment at the time you send in the offer.
Why You Need to Hire a Tax Preparer
You should hire a tax preparer who is familiar with the Offer in Compromise. They will be able to help you determine if you qualify and ensure you submit everything you need for the offer. People who try to go through this process alone usually have their offers rejected. The IRS doesn’t make it easy or else everyone would do it.
A tax accountant can help you move through the process faster and with a better chance of success. They can also guide you to any other solutions which may be a more suitable option for your situation.
