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If you’re applying for an offer in compromise due to doubt as to collectibility or effective tax administration, you’ll need to submit Form 433-A to the IRS.
Offer in compromise Form 433-A is an eight-page worksheet comprised of 10 sections and lots of documentation to prove your financial status.
You might want to hire a tax professional to help you complete the offer in compromise Form 433-A correctly for the best chance at getting approved.
If you cannot pay off your tax debt for legitimate reasons, the Internal Revenue Service (IRS) might allow you to settle for less than the full amount. This is called an offer in compromise. While the end result is advantageous for those needing help paying off their taxes, the qualifying process can be tedious. It requires filling out forms, providing ample documentation, and waiting for approval. Here’s how to properly navigate some of the paperwork.
With an offer in compromise, you’re essentially “offering” the IRS a lower amount to pay off your tax debt. Only certain individuals are eligible for an offer in compromise, and they fall under one of three categories:
Doubt as to Collectibility. This is the most common type of offer in compromise and applies to people who don’t have sufficient income or assets to pay off their taxes.
Doubt as to Liability. You might qualify if you can prove the amount of taxes the IRS says you owe is incorrect, due to circumstances such as mistakes on your tax filings or a bad audit.
Effective Tax Administration. In this scenario, you do have sufficient income or assets to pay your debt, but doing so would cause significant financial hardship. This is the most challenging type to qualify for.
Each of these cases requires filling out and submitting specific forms to the IRS.
What Is IRS Form 433-A?
If you’re applying for doubt as to collectibility or effective tax administration, you must fill out both Form 656 and, if you’re an individual and not a business, offer in compromise Form 433-A: Collection Information Statement for Wage Earners and Self-Employed Individuals. Within the latter form, you must describe your financial status and how it qualifies you for an offer in compromise. The IRS uses this information when calculating how much tax debt you can afford to pay, using its reasonable collection potential formula.
Steps for Completing Form 433-A
This eight-page form has 10 sections that you must fill out and submit to the IRS. Here we’ll break down the requirements for each one.
Section 1: Personal and Household Information. Provide all your personal information, including your address, birthday, Social Security number, spouse’s information, and dependents. This allows the IRS to identify and contact you.
Section 2: Employment Information. Fill out information about your employer as well as your spouse’s. This helps the IRS evaluate your income.
Section 3: Personal Asset Information. This long section is where you list all your accounts, cash holdings, investments, life insurance policies, real estate, cars, and other assets. You’ll need to attach documentation for all these.
Section 4: Self-Employed Information. Sections 4, 5, and 6 only apply to individuals who are self-employed. The former is where you list your business’s physical and contact information.
Section 5: Business Asset Information. Similar to Section 3, list your company’s accounts, real estate, equipment, etc.
Section 6: Business Income and Expense Information. Provide incomes, receipts, and expenses related to your business.
Section 7: Monthly Household Income and Expense Information. This should state the entire household’s income, including yours, your spouse’s, and that of any other contributors. For this, you’ll need to include paperwork such as Social Security documents, pay stubs, any rental income, child support, alimony, etc. Then list your monthly expenses, from car payments and insurance to food and clothing.
Section 8: Your Minimum Offer Amount. This worksheet helps you calculate how much tax debt you can afford to pay.
Section 9: Other Information. Here’s where you can input information that didn’t fit into any of the other sections. This might include your involvement in lawsuits, filing for bankruptcy, or trusts.
Section 10: Signatures. Both you and your spouse, if applicable, must sign the document.
As described, you’ll need to attach a lot of paperwork and documents to offer in compromise Form 433-A as proof of your financial situation. These might include:
The last three months’ bank statements, credit card statements, and pay stubs
Current mortgage, loan, and vehicle statements
Insurance statements showing the value of all your policies
If you’re self-employed, the business’s income and expenses for the last three months
Proof of the last three months’ total expenses, including transportation and health care
Any recent court-ordered payments
Send offer in compromise Form 433-A, Form 656-B (which spells out your “offer” and payment terms), and the $186 application fee if you don’t meet the low-income exemption to the designated IRS address. Be sure to make copies for your own records.
The IRS has two years to approve or reject your application. If it hasn’t made a decision by then, your request is granted automatically. If your offer gets accepted, you can pay off your revised tax debt in two ways:
An initial lump sum of 20 percent of the agreed-upon amount, plus the remainder in no more than five installments
A periodic payment of six or more installments over no more than two years
Who Can Help?
The forms and documents involved in applying for an offer in compromise can be tedious and complicated. If you need help, a tax attorney can make sure the process goes smoothly and accurately by handling all paperwork and communications with the IRS. This can provide much-needed peace of mind when you’re working through a difficult financial time.
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