Individuals who cannot pay the full amount of federal taxes they owe have several tax relief options they can qualify for. One of these is an offer in compromise. Before granting you leeway on your taxes, however, the Internal Revenue Service (IRS) will critically evaluate your offer in compromise application and its supporting documents. Here’s how the process works, according to the Internal Revenue Manual.
If you qualify for an offer in compromise, the IRS accepts your “offer” to pay a lower amount of taxes than you owe. You are then required to pay off the agreed-upon amount within a certain time period to remain in good standing with the IRS. You might be eligible for an offer in compromise under the following conditions:
Depending on your circumstances, you must fill out and submit the required forms to the IRS, plus proof of your financial situation. Using this information, the IRS will determine if you’re able to pay your full taxes or whether it should accept your offer of a lower amount. If the IRS does accept your offer, you must pay it off beginning with one lump sum of 20% of the agreed-upon amount, then the rest in no more than five installments, or you can pay in six or more installments within two years.
The IRS uses its intricate reasonable collection potential (RCP) formula to estimate how much tax it can realistically collect from you. It does so using the information you submitted on Forms 656 and 433, assuming you fall under the Doubt as to Collectibility or Effective Tax Administration reasons for eligibility. The IRS factors in assets, income, and expenses when calculating RCP. According to the Internal Revenue Manual’s offer in compromise section, your offer must be equal to or more than this RCP for the IRS to accept it.
The IRS goes through a lengthy list of steps and verifications when determining your RCP and whether to accept your application. As described in the Internal Revenue Manual offer in compromise, the IRS will first verify the information you provided in Form 433. It will do so by:
After completing this verification, the IRS will research and review all your paperwork. It might request more information or documentation if:
The IRS evaluates assets and expenses very closely to determine your RCP and whether to accept your offer in compromise. It ascertains the value of all your assets, often in person, to determine how much equity you have. Items such as boats and planes might require an appraisal. The IRS then places a quick sale value on each asset that represents how much you could quickly sell it for in its current condition. It will also factor in income-producing assets, such as inventory or machinery.
The IRS also considers the following to be assets:
Expenses the IRS takes into account include basic living costs, such as housing and utilities. It will look at copies of your mortgage or rent, utility bills, and maintenance costs when calculating this figure. The IRS does consider regional variations in living expenses. It also factors in whether you share a household or expenses with someone else who’s not liable for your tax debt. Transportation and car payments are expenses, as well, particularly when used for health care or income purposes.
The offer in compromise process is time-consuming and complicated. To ensure it goes as smoothly as possible and that you’re adhering to the Internal Revenue Manual’s offer in compromise rules, you might need to seek a qualified tax attorney or tax debt relief company’s help. These individuals can help by gathering the appropriate paperwork and documentation, communicating effectively with the IRS, and relieving some of your stress.
The Internal Revenue Manual lists very specific requirements for individuals to qualify for an offer in compromise. The financial details the IRS will gather and verify in making its decision are many. Let us help you through this process and on the road toward debt relief.