An Offer in Compromise is an agreement made with the IRS that allows you to settle your tax liability for less than you owe.
It can be an option for people who are unable to pay their taxes in full, or for people whom tax payment creates financial hardship. The IRS will consider your ability to pay, income, expenses, and asset equity when determining whether or not you qualify for an Offer in Compromise.
How Does an Offer in Compromise Work?
With an Offer in Compromise, the IRS determines what percentage of your outstanding tax liability it can reasonably collect in the next 2 years. This is termed the “reasonable collection potential.” In order to qualify and successfully retain an Offer in Compromise, you agree to:
- Pay the full amount of the proposed offer stated in the Offer in Compromise.
- File and pay your taxes on time for the next 5 years.
- Allow the IRS to keep any payments, refunds, and credits that were applied to
your tax debts prior to the submission of your Offer in Compromise.
- Allow the IRS to keep any and all tax refunds you would have received during the
calendar year your Offer in Compromise is approved.
Can I Prepare My Own Offer in Compromise?
Yes you can. This is not recommended, however. The goal with back taxes at the IRS is to get as much money from you as possible. They use all legal tactics to accomplish this, including a complex tax code and hard-to-navigate bureaucracy. The amount of documentation required is extensive, and therefore, the assistance of a CPA and tax attorney is recommended. However, if you really do you want to do this yourself, please do the following in order to maximize your chances of approval:
- Make every document you prepare and submit as easy for the IRS to accept as possible. That means no errors and follow the instructions to the letter.
- Prepare IRS Form 433A and Form 656.
- Prepare Form 433B in addition to Forms 433A and 656 if you are self-employed.
- Prepare a document detailing the reasons you feel an Offer in Compromise is
You will also need to collect a large set of backup documentation. An Offer in Compromise takes one to two years to complete, and even the slightest deviation in paperwork can delay the process even further. Additionally, the officer assigned to your case may request additional documentation in order to make an accurate determination regarding your request.
It is important to note that a CPA or enrolled agent does not have attorney client privilege, and could be forced to testify against you in tax court. Using a tax attorney to help file and process your OIC will circumvent this problem.
The Harsh Realities of Having Your Offer in Compromise Approved
Many companies make exaggerated, and sometimes just downright false, claims that they can help you settle your tax liability for just a few cents on the dollar. While this is technically possible, the IRS approved 16% of the total offers it received in 2004, accounting for a total of 19,546 offers. During the first five months of 2010, the IRS accepted 24% of all offers. This is an example of why an expert is a worthwhile investment.