Owing taxes to the Internal Revenue Service (IRS) is not easy. Unlike private creditors, the IRS has a lot more power to make sure that they get back what they are owed. But, just like with commercial creditor, there are ways of procuring tax debt help in order to fix your tax debt problems. One of the programs that the IRS created to provide tax debt relief to those having problems paying off their debts is called an Offer in Compromise.
What is an Offer in Compromise?
An Offer in Compromise is a lot like a settlement with a commercial creditor. You make an offer to pay as much of your tax debt as you think you can pay. It also helps to clear tax debts that you owe to IRS. The IRS then looks over the offer you have made and either accepts it, counter-offers, or rejects it according to the terms of your tax debt settlement. Typically the IRS will accept your offer if the amount you owe is in doubt. If you can show that it is unlikely, the IRS will be able to collect the entire amount of the debt, or you can show special circumstances.
In order for the IRS to agree to an Offer in Compromise due inability to clear tax debts that you owe, the IRS has two requirements. First, you must agree that the amount the IRS says you owe is correct. Second, you must show that you would be unable to pay the entire amount owed within the statutory period by submitting Form 433-A, the Collection Information Statement and its accompanying worksheet.
The IRS has also established guidelines to determine what qualifies as a special circumstance. In order to settle tax debt under special circumstance, make sure that you do not contest the amount the IRS says you owe, or that you can pay it back. Rather, you must be able to demonstrate that the collection of the debt would create an economic hardship, or that collection would be unfair. While there are no official rules governing who qualifies under special circumstances for tax debt relief, the IRS usually grants Offers in Compromise because of special circumstances to the elderly and indigent.
Anyone with a tax lien or levy placed on their property should realize that filing an Offer in Compromise will not remove the lien or levy. In order to clear tax debts on Tax liens full payment of the taxpayer’s debt is a must. Levies may be released after an Offer in Compromise has been accepted if the taxpayer petitions to have them released.
Submitting an Offer in Compromise for tax debt settlement will keep the IRS from placing a tax levy on a taxpayer’s property. Once an Offer in Compromise has been submitted by the IRS debt tax attorney, the IRS will not levy a taxpayer’s property once a valid offer has been accepted for processing is pending, and if the offer is rejected for 30 days after rejection, or during an appeal of a rejection.
There are several terms and conditions the IRS requires every taxpayer to comply with when they submit an offer of compromise. If you want to know how to get out of tax debt keep in mind the following:
- You must pay the amount you are offering in full, and to make regular payments in accordance with the offer while the offer is pending. In order to obtain tax debt help from IRS you must always ensure on the payments part, else it becomes difficult.
- The IRS will keep any payments you have made for any tax debt settlement before the Offer in Compromise was made. For availing tax debt relief from the IRS your former payments should be handed over to them to look into. Your tax debt attorney will look over the legal formalities that need to be fulfilled with the IRS.
- In order to settle tax debt with the IRS you must file all of your tax returns and pay any taxes owing on time for the next 5 years. You can look for debt and tax resolution companies who can help you to clear your tax debt for those years.
- If you get a tax refund in the year you file an Offer in Compromise, the IRS keeps it in return of the tax debt relief it provides.
It is essential, that once the Offer in Compromise has been accepted, to do your best to fulfill these terms. If you can settle tax debt with IRS following their rules and guideline then you can expect certain beneficial tax debt relief options. If you do not, then unlike with a commercial creditor, the IRS is free to revoke the agreement and reinstate the entire amount of your tax liability.
Advantages to making an Offer in Compromise
The biggest advantage to filing for an Offer in Compromise is avoiding further collection efforts by the IRS. Unlike commercial creditors and collection agencies, the IRS does not need to get a court order in order to impose a lien on your property or garnish your wages. You can settle tax debt with the IRS directly without any other court approval.
Another advantage of tax debt settlement with an Offer in Compromise is the payment options. Unlike the American tax debt relief programs the payment options provided by the IRS is consumer friendly. The IRS has three different options that a taxpayer making an Offer in Compromise can choose from:
- Lump sum cash offer: The offer must be paid in no more than five installments on written notice of acceptance by the IRS. If a taxpayer chooses this option, the IRS requires that 20% of the offer amount be paid at the time the Offer in Compromise is filed.
- Short term period payment offer: This plan requires the debt to be paid off within 2 years of the receipt of the offer.
- Deferred periodic payment offer: The entire debt must be made within the remaining statutory time for collections. The IRS statute of limitations on debt collection is 10 years from the date of assessment to collect taxes owed.
When considering what payment option is best to clear tax debt, every taxpayer should keep in mind that the IRS is under no obligation to accept the Offer in Compromise with the payment plan they choose. The tax debt attorney may chalk out a plan for some tax debt relief options but it all depends on the whims of the IRS to consider your case. Therefore, every taxpayer filing an Offer in Compromise should take a careful look at their ability to pay and choose the option that will get them out of debt with the IRS the fastest.
Making an Offer in Compromise
An Offer in Compromise is not difficult to file once you know the steps. In order to settle tax debts with the IRS you need to follow these steps. There are three forms that must be completed, Form 433-A worksheet, Form 656 (the proposed agreement), and Form 433-A (the collection information statement). All the forms should be submitted by mail to the IRS along with any backup documentation to prove your ability to pay, your first payment, and the $150 filing fee. The filing fee may be waived off for any taxpayer who can prove on Form 656-A that they are living below the poverty line. In fact to get any tax debt relief from the IRS you have to provide for the proper legal documents to back it.
Offer in Compromise Timeline
Typically it takes a taxpayer 1-4 months to prepare the Offer in Compromise forms along with their accompanying documentation. You can also get the help of a tax debt attorney to prepare the documentation for the IRS. After the documentation the IRS takes approximately 1-2 years (13-18 months) to process and evaluate the Offer in Compromise. Finally, it takes 1-3 months to finalize the offer and arrange the payment options. If the arrangements are properly done necessary tax debt help will be provided by IRS to clear your tax debts.
Therefore, anyone making an Offer in Compromise for tax debt settlement should be prepared, and continue to pay on their debt in accordance with their Offer in Compromise.
Getting your Offer in Compromise accepted
Each year, the IRS approves only a small number of the Offers in Compromise it receives. In 2004, for example, the IRS only approved 16% of the offers submitted to it. In order to increase your chances of getting tax debt help from IRS and getting your Offer in Compromise accepted, you should:
- Be honest with the IRS. Don’t conceal assets or purposefully misreport your income in order to get a better deal. If you need help filling out the forms, get help from a tax debt attorney. He can understand your case better and provide the proper tax debt relief options.
- Complete and submit all the backup documentation you can. The more information the IRS has, the better your chances are of getting your offer accepted.
- Make sure you make payments in accordance with your Offer in Compromise in full and on time while your offer is being processed.
Other options to pay delinquent taxes
The IRS offers a number of payment plans and installment agreements for tax debt settlement to tax payers. If you owe more than $25,000 in combined taxes, penalties and interest you will need to fill out Form 433-F Collection Information Statement, as well as the Request for Installment Agreement, Form 9465.
If you have not received a bill from the IRS for the current tax year, the IRS allows you to use an online payment agreement to establish an installment plan for the current year. You can also use the online payment agreement form if you have less than $25,000 or less in taxes, penalties, and interest. The terms and legal agreements can be clarified from the IRS tax debt attorney if needed.
For more on payment and installment plans, you can visit the IRS’s website at www.irs.gov.
Working with a Settlement Firm
An experienced debt settlement firm has all the resources to ensure that your Offer in Compromise is complete and accurate, improving your chances of getting proper tax debt help and also your Offer in Compromise accepted by the IRS. When choosing a debt settlement company, you should:
- Make sure that the debt settlement company is reputable before you go for tax debt settlement with the company. Check their Better Business Bureau accreditation, success stories, and prior client testimonials.
- Do not enroll with any company that offers to help you pay “pennies on the dollar”. Some of the American tax debt relief companies sometimes spread false traps to extract more. The IRS has published consumer alert warnings that companies making these offers have taken advantage of consumers in the past. The companies make false promises to settle tax debt by charging huge fees to help you out when they know the offer will not be accepted.
- Do not enroll with a company that only offers to help you with tax debt settlement through Offers in Compromise. The IRS will generally accept an Offer in Compromise after all of the other options to pay your tax obligations have been exhausted. They know well that there are other options of obtaining tax debt relief as well. Therefore, you should choose a company who can help you with payment plans, installments as well as Offers in Compromise.
