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If you owe the IRS an outstanding tax bill and you’re struggling to pay the full amount — even in smaller installments — an Offer in Compromise might be the right solution for you.
An Offer in Compromise is an agreement between you and the IRS in which the IRS agrees to accept less money that you owe in exchange for you paying off your back taxes. Once you make the agreed-upon payments, your IRS back taxes will be officially paid off.
You might wonder why the IRS would accept less than what it’s owed, but the reason is straightforward: ultimately, an Offer in Compromise helps the IRS collect the money it’s owed while helping taxpayers settle their back taxes and avoid any future issues. This includes older obligations that the IRS may soon be unable to collect (the IRS can actively collect back taxes for up to 10 years).
There are two types of Offers in Compromise:
A Lump Sum Offer, in which you are expected to pay the full amount of your offer in a lump sum or in 5 or fewer installments within 5 months after the offer is accepted.
You must include a nonrefundable payment equal to 20% of the offer amount along with the application form and fee.
Periodic Payment Offer, which gives you a slightly more time to pay the agreed-upon amount if it’s payable in 6 or more monthly installments and within 24 months once the offer is accepted. The first proposed installment payment of the periodic payment offer should be included with your application (this is generally nonrefundable)[https://www.irs.gov/taxtopics/tc204]
The amount you should offer is based on the amount you can afford to pay based on a calculation involving your monthly disposable income and the reasonable resale value of any property you can liquidate, which is called “reasonable collection potential.”
To calculate your reasonable collection potential (RCP), begin with your total monthly income (this includes wages, net business income, distributions from an account, Social Security payments, alimony, child support, etc) and subtract all necessary living expenses (rent, utilities, gas, groceries, etc) — this is your monthly disposable income.
Multiply your monthly disposable income by 12 (if you’re applying for a lump sum Offer in Compromise) to calculate your monthly disposable income or by 24 (if you’re applying for a periodic payment Offer in Compromise).
This number can be added to the quick sale value (80% of the fair market value) of your assets, such as property, vehicles, jewelry, or other investments.; you can even use the equity in your home if needed.
Your proposed offer should be higher than the reasonable collection potential. If you can’t pay the proposed amount in a lump sum, you can break it into installments. If you choose a payment period of over 5 months, the IRS will instead use 2 years of your disposable income to calculate the reasonable collection potential, which doubles the amount you have to offer.
Consider consulting a back tax assistance professional who can help you run the calculations and assist you with your Offer in Compromise application.
Not everyone qualifies for an Offer in Compromise, but there are three conditions that make your application more likely to be accepted:
* You aren’t able to afford the full amount or don’t have the income and assets to pay the full amount before the 10-year statute of limitations is up.
* You can prove that paying the full amount would cause you serious economic hardship, such as not being able to cover essential bills.
* You believe the amount you owe (versus what the IRS believes you owe) is different and you are able to show records to prove this discrepancy.
Additionally, you must also:
* Have filed all necessary tax returns
* Be up-to-date with estimated tax payments (for self-employed individuals or those who own small businesses)
* Be up-to-date with federal tax deposits (for individuals who own a business with employees)
* Not be in the middle of an open bankruptcy proceeding
The IRS will evaluate your “reasonable collection potential” (by factoring your income sources such as current and future wages, investments, and any assets that can be liquidated) compared to your back taxes and whether your Offer in Compromise is the maximum amount you can afford to pay. If the offer you made is comparable to your reasonable collection potential, you will be much more likely to be approved for an Offer in Compromise.
You can also use the [IRS Offer in Compromise Pre-Qualifier Tool][https://irs.treasury.gov/oic_pre_qualifier/] and answer questions regarding your assets, income, and expenses to see if you may qualify.
* 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).
Be sure to 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 finances.
No. In addition to the first payment you made with your application (a 20% down payment for the lump sum Offer in Compromise or the first projected monthly payment for a periodic payment Offer in Compromise), you should continue to pay as outlined in your application while you wait for a decision. Not paying the amount required 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.