An offer in compromise is a back tax assistance program offered by the IRS and many state government agencies. It aids those who owe a large amount in taxes and are unable to pay the full amount. If you are struggling under the weight of your back taxes and do not have the ability to pay it, you can submit an offer in compromise to the IRS. This offer is the amount you are able to pay and, if accepted, will be treated by the government as payment in full.
To submit an offer in compromise to the IRS, you must complete Form 433-A (for individuals) or Form 433-B (for businesses). If you are submitting for business back taxes, you must also include Form 656(s). The IRS requires you to pay a nonrefundable application fee when you submit form 433-A or 433-B. Before you submit, make sure you meet the eligibility requirements set forth by the IRS. Some of these requirements include:
You can find additional information and make sure you qualify for this option with the IRS’s Offer in Compromise Pre-Qualifier tool.
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The acceptance rate of offers in compromise submitted to the IRS is low, although the rate has been rising steadily over the past few years. In the early and mid-2000s, the acceptance rate was between 17 and 26 percent. However, from 2009 to 2013, the acceptance rate rose sharply, increasing by nearly 95 percent. In 2014, the IRS accepted 40 percent of the 68,000 offers it received. According to statistics in the IRS Data Book for 2017, the IRS received 62,000 offers in compromise and accepted 25,000 that year; approximately 42 percent.
Most taxpayers who submit offers in compromise have at least several thousand dollars in owed back taxes. The dollar value of the average accepted offer in compromise in 2014 was $6,643. In 2017, the average dollar value rose to $10,234.48. This amount represents less than the actual amount of tax owed, so consider that if you are thinking about submitting an offer in compromise. The offer you submit must be close to what the IRS expects it could collect from you in a reasonable amount of time. The IRS will likely reject an offer that is too low.
The IRS has federal tools at its disposal to collect back taxes. The U.S. Department of Treasury can aid in the collection process, potentially garnishing your wages and withholding any tax refunds owed to you. It could even put a lien on your assets, although this isn’t done as frequently. Review what percentage of back taxes the IRS could potentially collect before you submit your offer.
According to the National Taxpayer Advocate, the IRS collects an average of 15 cents per dollar of what is owed on tback taxes that are two years old. When the outstanding balances exceed three years, the average collection amount drops even further. If you qualify for an offer in compromise, you can reduce your financial burden substantially.
Part of what has helped increase these rates is the Fresh Start initiative, which the IRS announced in 2012. This initiative offers more flexible terms for the offer in compromise program specifically. The goal being to aid more taxpayers who are struggling under the burden of their owed taxes. The Fresh Start program also benefits the IRS because it helps reduce the number of tax liens issued. New rules have been in place since the program expanded in 2012, making it easier for taxpayers to qualify for offers in compromise and installment agreements.
Recent changes to the processes of submitting and reviewing offers in compromise have created a more streamlined experience for those looking to take advantage of this back tax assistance option. If you qualify, you can use the streamlined process and contact a member of the IRS’s offer in compromise review team by phone. Since this option was launched, the streamlined offers in compromise have been processed 28 days faster than those submitted through the traditional submission process.
If you do not qualify for an offer in compromise, you might be eligible for the installment program offered through the IRS. The installment program is an agreement between you and the IRS stating that you will pay back the taxes you owe. The back taxes must be repaid within a set period, through payments each month.
If you can pay back the taxes in a shorter period, you might not have to pay a user fee. However, even with any fees associated with a longer-term installment plan, you can avoid major penalties and potential liens by setting up and following the payment terms of an installment plan.
When you’re suffering under the financial weight of owed taxes, it’s important to know you’re not alone. The IRS has programs in place that can help you reduce your tax burden or pay it back over time. Although the acceptance rate has been low for offers in compromise, it is increasing steadily. Additionally, you can use the resources at Solvable to figure out how to free yourself from back taxes. We offer a variety of calculators, articles, and other helpful tools that can help you overcome the financial strain of owed taxes.