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. The IRS encourages an Offer in Compromise only after all other options have been exhausted.
How Does an Offer in Compromise Work?
Basically, 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 IRS 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. In my 18 years as a tax lawyer my experience is that the IRS is a gigantic bureaucracy that is unafraid to use its power when necessary. The amount of documentation required is extensive, and the experience of how and what information to submit is critical. That’s where a proven CPA and Tax Attorney is a worthy investment. However, if you do you want to file an OIC yourself, please do the following in order to maximize your chances of approval:
- 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 necessary.
- Carefully prepare all materials
- Present your materials and back-up information in a clear and logical format
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.
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 chances of actually having your self submitted Offer in Compromise approved are pretty low. 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. In order to maximize the chance of approval, the assistance of a Tax Attorney with an extensive track record of successful IRS compromise offers is recommended.
Until next time,
Jeff Fouts, Tax Attorney
Here’s a bio: I’m happily married with two kids. I’m a real small town tax lawyer, (Ellijay, pop. 1,584) not some fictional marketing character. I’ve represented tax clients against the IRS in all 50 states, and in 21 foreign countries. I have 18 years experience, thousands of satisfied clients, about 8 critics at last count, and an A+ BBB Rating.
I’m a member in good standing of the bar and have active memberships in courts from Georgia to Washington D.C., including the U.S. Supreme Court. I deal directly with my clients and have a small, tireless staff of tax specialists.
You can put off your tax problem, or put us to work.