Written by Aaron Hall | Last Updated November 7th, 2019Aaron N. Hall is a Content Management Specialist for Best Company and specializes in the home security and medical alert system industries. He would tell you that he’s probably taking pictures, writing music, or working on his next novel while out of the office, but he’s actually just watching Parks and Rec.
(This article is 1 of 15 chapters in The Definitive Guide to IRS Debt Forgiveness. Return to the guide to get the full explanation of IRS Debt Forgiveness.)
It can be a scary experience when you're in deep with the Internal Revenue Service. Whether the IRS is taking a major chunk out of your paycheck, seizing funds from your bank account, or taking control of your house or car, one solution that is almost always available to you is what's known as an offer in compromise.
If you're nailed with a tax debt that seems impossible to pay back, you could issue an offer in compromise. An offer in compromise represents the most money that the IRS can receive from you within a reasonable period of time. It allows you to settle your tax debt for less than the original amount you owe; however, the IRS will typically only approve it if all other options are improbable.
For starters, there's a non-refundable application fee of $186 dollars for an offer in compromise. Other forms and documentation you'll need to acquire are as follows:
- IRS Form 656: Offer in Compromise Booklet and Form
- Form 433-B: Collection Information Statement for Businesses
- Form 433-A: Collection Information Statement for Wage Earners & Self-Employed Individuals
- IRS Form 656-A: Income Certification for Offer in Compromise. Application Fee and Payment
- Three months of documentation on every expense and income you have, including pay stubs, credit card statements, housing, investments, transportation, tax returns, etc.
Once you've applied, be prepared to wait a couple of months before you get approved. Regardless, there's a strong possibility you may not get approved at all if the IRS thinks there's a better way for you to pay off your tax debt. If you haven't heard anything within a two-month span, it's not a bad idea to follow up with the IRS.
Rate of Acceptance
According to Forbes, only 40 percent of offers in compromise were accepted in the year 2014. The number has increased slightly since the Fresh Start initiative in 2012, but that doesn't mean you'll get easily accepted. The IRS looks to see if you can pay off your tax debt in any other way before they'll approve an offer in compromise.
If your offer in compromise proposal does get accepted, it's based on three grounds: doubt as to liability, doubt as to collectibility, and effective tax administration.
Doubt as to liability. Essentially, there must be a doubt as to whether or not its collectible and whether or not that liability actually exists. It's a small possibility that your tax debt could be an error in filing, which would then make the offer in compromise very reasonable.
Doubt as to collectibility. This indicates that you agree that you owe taxes but you can't pay them in full in a set period of time. The IRS needs to know for sure that you won't be able to pay in full, otherwise, you won't qualify for an offer in compromise.
Effective tax administration. Effective tax administration indicates that paying the full amount would render an intense economic hardship on the individual, so the IRS would accept your proposal at that point.
Accepted, or No?
If your offer is accepted, you'll have the option to pay a lump sum or over a period of time through a periodic payment offer. A lump sum is paid in five or fewer installments. If you want to pay a lump sum, you must submit Form 656 with a nonrefundable payment of 20 percent or more of the debt. A periodic payment offer is paid in over six installments or more within a 24-month period. Like the lump sum, your Form 656 must include the first installment of the payment plan. This amount is also nonrefundable.
If your offer in compromise proposal is rejected by the IRS, you will be notified by mail. The good news is that if you are, you have the right to appeal. The IRS will provide details as to why you were rejected and what process you need to go through to appeal. But make sure that you're timely because the IRS Office of Appeals only gives you a 30-day window once your proposal is rejected.
Should I Do This Alone?
That would not be recommended. Websites such as BestCompany.com have done the research for you in finding quality tax debt relief companies that will ethically take you through the tax debt relief process. Currently, the top rated companies in the industry are Tax Defense Network, Optima Tax Relief, and StopIRSDebt.com. If you find yourself pinned by the IRS, it's best to contact one of these companies and acquire professional help.