If the taxes you owe the federal government are more than you can afford, you might consider submitting an offer in compromise. This debt relief program is administered on a federal level through the Internal Revenue Service (IRS) and allows taxpayers to submit an offer of an amount they can pay toward their tax debt. If the IRS accepts the offer, the taxpayer will pay that amount as the full value of the amount owed, potentially saving thousands of dollars.
When submitting an offer in compromise, you must include a significant amount of documentation outlining your personal financial situation. This includes all your expenses to show why you are financially unable to pay the full amount. You will also need to explain why you can’t pay the taxes you owe the IRS, which could include:
Although an offer in compromise is a way to settle a tax debt, the IRS does not accept all offers. An offer must be reasonable and agreeable to the IRS. If the reviewer believes the IRS can use the tools at its disposal to collect a higher amount from you within a reasonable time, your offer will be rejected. The IRS can seize and sell your assets and property if you do not pay your tax debt, so it’s important to take the right steps toward paying it off in a timely manner.
Image via Flickr by kenteegardin
If you plan to submit an offer in compromise to the IRS, you will need to start by filling out several required forms and collecting all the necessary documentation. The first is Form 433-A, which is the collection statement for wage earners and self-employed individuals. On this form, you will document all the information that shows you are eligible for an offer in compromise, including details about your personal financial situation. The IRS reviewer will use this form to determine your reasonable collection potential on the debt you owe.
The form includes six sections. The first section asks for information about you and your household, including your marital status, other members of the household, and whether you own or rent. You must also include your Social Security number, address, contact information, and date of birth. The next section requests information about your employment and your spouse’s employment, if applicable.
In section three, you must outline all your assets, including property owned, bank accounts, investments, and retirement accounts. Make sure to outline any mutual funds, stocks, bonds, and other investment assets you own. The IRS will also request information about your available credit. Personal assets include jewelry, artwork, and furniture. If you own real estate, include details about all properties and the condition of each.
The final three sections discuss business income, assets, and expenses, and they only apply to those who own their own businesses.
When you submit an offer in compromise, you must include details about your regular expenses. The IRS has allowances for basic living expenses, which include:
Food includes meals eaten at home as well as away from home but excludes the purchase of items that are not edible. Personal care products and services include oral hygiene, hair, and shaving products, as well as those used for other personal care. Housekeeping supplies include all items needed to care for a dwelling, such as cleaning and laundry products, postage, lawn and garden supplies, delivery services, and other miscellaneous household needs. The apparel and services category includes footwear, clothing, patterns and materials for making clothing, dry-cleaning and laundry fees, clothing rental, alterations and repairs, and jewelry repairs.
The allowances vary, depending on the number of people in a household. Make sure to review these allowances before submitting your offer in compromise. If your expenses drastically exceed these amounts set forth by the IRS, your offer will likely be rejected based on the fact that you are overspending on your monthly needs.
It’s important to note that these allowances do not include rent or a mortgage payment or utilities. You should include these amounts on your documentation when you are submitting an offer in compromise.
Some individuals’ personal situations require them to spend more in these categories. For example, disabled taxpayers might have to spend more on housing and transportation because they need specialized housing without stairs and rely on others to get where they need to go. In these cases, it’s necessary to provide detailed documentation about why the individual is paying more to avoid a rejection from the IRS.
If your offer in compromise is rejected or you are not eligible for an offer in compromise, you might want to look into setting up an installment plan with the IRS. With this option, you can set up monthly payments to pay down your tax debt, rather than having to face the full amount.
When you are considering submitting an offer in compromise because of your tax debt, it’s important to be as informed as possible to increase the likelihood of having your request approved.
If you need more information about tax debt relief, check out the resources available at Solvable. We offer financial help to those struggling with any level of outstanding tax debt, as well as educational articles, advice, and strategies that can help you reduce what you owe.