Here’s how the IRS describes an offer in compromise:
“An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship.”
There’s always a catch (or three)
Sounds reasonable, right? But the verb “may be” hinges on some rather rigorous criteria that even the IRS admits disqualifies around three out of four applicants seeking to lower their tax debt. The criteria for acceptance are:
- There is doubt as to the taxpayer’s liability; i.e., that the IRS auditor made some error and incorrectly calculated the amount owed.
- There is reasonable doubt that what the taxpayer owes can actually be fully collected. This doubt exists where “the taxpayer’s assets and income are less than the full amount of the tax liability.” The taxpayer would have to be in extremely dire financial straits and with scant assets.
- There is no doubt that the tax liability exists and could be collected, but doing so would impose an unfair or inequitable economic hardship “because of exceptional circumstances.”
Get the picture? How do get the IRS to admit they made a mistake in interpreting our tax code with its arcane and complex wording? Moreover, to qualify under the second criterion, you might not be able to even afford the $150 offer in compromise application fee and filing for bankruptcy might be a better option. Finally, guess who gets to determine “exceptional circumstances” when it comes to forgiving a tax debt. (Hint: It’s not the taxpayer.)
Applying for an offer in compromise
The process becomes complex and the IRS forms (656, 433-A, 433-B and 656-L) cover the particular circumstances surrounding the taxpayer’s status and reason for applying. Anyone not covered by the exceptions — doubt of tax liability, or low-income — submitting the IRS Form 656 must attach a $150 application fee.
So the bottom line is that you fill out the forms and do the math that results in an offer from zero to some reduced dollar amount. You can offer to pay the full (reduced) amount — a lump-sum offer — payable in 5 or fewer installments and within two years after the IRS accepts your offer. Be prepared to attach another check for 20 percent of the offer amount in addition to the application fee, of course.
There’s more to it
The process is somewhat more complex than described here, but you don’t have to go it alone and deal with some bullying, know-it-all auditor in getting your tax debt cleared. Contact us and we’ll guide you through the process and get you back on track.