OFFER IN COMPROMISE
The Internal Revenue Service has a special program called an “Offer In Compromise” that allows taxpayers to settle outstanding tax debts with the IRS at a discounted rate. The following is a brief overview of the purpose, procedures and costs involved in submitting an “Offer In Compromise” to the IRS to settle outstanding tax liabilities under this special program.
The purpose of an Offer in Compromise is to have the taxpayer and the IRS agree to settle a tax liability for a payment less than the full amount owed. The goal is to achieve collection of what is potentially collectable at the earliest possible time and at the least cost to the government. There are three different scenarios in which the government will consider and Offer in Compromise:
- Doubt as to Collectibility. This is when doubt exists that you could ever pay the full amount of tax owed. Before the IRS can consider a doubt as to collectibility offer, the taxpayer must not be able to pay the taxes in full either by liquidating assets or through current installment agreement guidelines. You must submit the appropriate collection information statement along with all required supporting documents to prove doubt as to collectibility
- Doubt as to Liability. This is when doubt exists that the assessed tax is correct. If you do not think that you owe the tax liability, you may submit an Offer in Compromise for “Doubt as to Liability”. You may not use this reason if the sole basis for filing an offer is because you are unable to pay the tax liability.
- Effective Tax Administration (ETA). This is when the taxpayer does not have any doubt the tax is correct and there is no doubt the full amount of tax is owed and could be collected, but an exceptional circumstance exists that would allow the government to consider your offer. To be eligible you must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.
Important Note: You will not be eligible for an Offer in Compromise if you are currently involved in a bankruptcy proceeding, if you have any unfilled federal tax returns, or if self-employed and have employees in which you have failed to make timely federal tax deposits.
You will need to complete IRS Form 656, which is the official compromise agreement and you will need to complete IRS Form 433-A or 433-B, which is a collection information statement. Additionally, you must also submit the following information for the three months immediately prior to the date you submit your Offer in Compromise:
- Proof of prior 3 months of earnings (pay stubs, social security, pension income, interest and dividend income, etc.)
- Copies of prior 3 months bank statements for all checking and savings accounts
- Copies of prior 3 months life insurance policy statements
- Copies of prior 3 months automobile loan statements
- Copies of prior 3 months mortgage statements
- Copies of prior 3 months of any other loan statements
- Proof of all expenses for the prior 3 months (canceled checks, billing statements, etc.) for the following:
- Utilities / telephone
- Car payments
- Repairs and maintenance
- Any business related purchases (supplies, inventory, etc….)
- Medical co-payments
- Any other monthly living expenses not listed above
There is a $150 application fee payable to the “United States Treasury” which is due with the submission of IRS Form 656.
Additionally, our fees are based on the time required by the individuals assigned to the engagement who will gather all data, prepare all IRS forms, and assemble all of the required documents.
Once your offer is accepted, the non-filing of future tax returns or non-payment of all taxes when due could result in the default of an accepted offer. If you default on your agreement, the IRS will reinstate the unpaid amount of the original tax liability, file a Notice of Federal Tax Lien for any unpaid tax liability, and resume collection activities.