If you’re struggling to pay the full amount of your tax debt, an Offer in Compromise is a potential solution. It’s an agreement between you and the IRS in which the IRS will agree to take less than what you owe in exchange for you paying off at least some of your tax debt. After you make the necessary payments, the IRS will consider your tax debt officially paid off.
The IRS will sometimes accept less than what you owe in order to help taxpayers settle debts and receive some of the debt that may soon expire (tax debt can be collected for up to 10 years).
There are two types of Offers in Compromise:
*Lump Sum Offer: You are expected to pay the full amount of the proposed Offer in Compromise in a lump sum or in 5 or fewer installments once the offer is accepted.
When you submit the application, you must include a nonrefundable payment equal to 20% of the offer amount along with the fee.
*Periodic Payment Offer: You are given more time to pay the proposed amount (6 to 24 months) in monthly installments after the offer is accepted.
When you submit the form, the first proposed installment payment of the periodic payment offer should be included (this is typically nonrefundable).[https://www.irs.gov/taxtopics/tc204]
The IRS doesn’t accept every application for an Offer in Compromise, and you will most likely have to wait before receiving a decision. This can take anywhere from four weeks to eight months after submitting the form and depends on the individual case and complexity of your tax debt and financial situation.
A decision by the IRS includes rejecting the offer, withdrawing the offer by you, returning the offer as not processable, or a failure to continue to make payments under an Offer in Compromise.
Typically, it takes around six months for the IRS to decide whether or not to approve or reject your offer. Specifically, five to nine months for individuals who are not self-employed and around seven to eighteen months for self-employed individuals (to make sure business and personal expenses aren’t being mixed) or taxpayers with more complex finances.
It can take even longer if you have to appeal or dispute their decision. In some cases, the IRS won’t even look at your application.
If you don’t hear anything from the IRS two years after the date you applied (whether it’s an acceptance, denial, or withdrawal), your Offer in Compromise will be automatically approved.
There are a few factors that may lead to an automatic rejection:
* You haven’t filed all of your required tax returns.
* You have an open bankruptcy case.
* You didn’t pay the required application fee.
* You didn’t pay the initial payment required.
* You didn’t pay your required monthly payments.
There are certain factors can speed up the Offer in Compromise process:
* Your only income is from disability or Social Security.
* You are over the age of 55, fully retired, and live on a fixed income.
* Your annual income is less than $30,000 on a W-2.
And there are certain factors that can slow down the process:
* You have to appeal your initial Offer in Compromise after it’s rejected, which can add processing time of 14 to 24 months
* You have a high amount of tax debt to settle (over $25,000). A balance of $100,000+ will take even longer.
* You have circumstances that are considered questionable, such as multiple vehicles, multiple loans, and random unexplained deposits.
To help you speed up the process, you will need to provide accurate, complete, and up-to-date information. Be sure to include all important documentation, even if it’s a blank page on your bank statements.
You’ll also need to include any explanations of information that could be considered questionable, such as if you have more in deposits than your income.
Medical conditions should be outlined in the cover letter and should include supporting documentation.
The IRS may send a request to follow up with more relevant information so it’s important to ensure that you respond in a timely manner, or you risk the rejection of your offer or prolonging the process.
The best way to ensure that your offer in compromise is submitted correctly is to have an experienced tax attorney guide you through the process.
* Complete [Form 656](https://www.irs.gov/pub/irs-access/f656_accessible.pdf), the application for an Offer in Compromise.
Select whether you are paying a lump sum or period payment, along with the amount you plan to offer.
* Complete Form 433-A (for individuals) or Form 433-B (for businesses), which requires you to fill out information on your household, income, and assets.
* Include a $186 application fee (unless you meet the Low-Income Certification requirements).
* Include your 20% deposit for a lump sum offer or your first payment for your periodic payment offer as outlined in Form 656 (unless you meet the Low-Income Certification requirements).
Keep track of the date you applied for an Offer in Compromise: if the IRS does not accept, reject, return, or withdraw your application within two years, the offer is considered accepted.
If your offer was rejected, you have 30 days to appeal. When the IRS sends a denial, it will include the minimum offer you should make based on your financial information.
No. It’s important that you continue to pay your monthly installments while you wait for a decision. Missing a payment can lead to your application being denied.
Arian serves as the CEO at Tax Hardship Center, LLC – one of the nation’s leading tax resolution companies. Credentialled by the US Department of Treasury as an Enrolled Agent, Arian is avid about providing transparency in the tax resolution industry. Arian is an author and editor at Solvable and contributes specifically on tax resolution topics. With nearly a decade of financial services experience, Arian has well-rounded knowledge of the tax resolution industry and has led Tax Hardship Center to become one of the nation’s top tax resolution companies.