What is an Offer in Compromise?
By filing an Offer in Compromise, you are offering to
pay less than the full amount of your tax debts to the
Internal Revenue Service. The IRS, at its discretion, may
accept less than full payment of your tax debts if there
is doubt as to whether the IRS could ever collect the full
amount of tax debt or if there is doubt as to whether you
are actually liable for the tax debt. Submitting an offer
in compromise is one of several ways to get out of tax
debt.
How Do I Apply for an Offer in Compromise?
You will need to fill out Form 656, Offer in
Compromise, along with Form 433-A, Collection Information
Statement.
What are the terms and conditions of the Offer in
Compromise contract?
The IRS sets forth all the Contractual Terms in an
Offer in Compromise.
In a nutshell, you agree to
- Pay the offer amount in the Offer in Compromise.
- File your tax returns on-time and pay your taxes
on-time for the next five years.
- Let the IRS keep any tax refunds, payments, and
credits applied to your tax debts prior to submitting
your Offer in Compromise.
- Let the IRS keep any tax refunds that would have
been payable to you during the calendar year that your
Offer in Compromise is approved.
If you don't fulfill the terms of the Offer contract,
the IRS can (and probably will) revoke the Offer in
Compromise and reinstate the full amount of tax liability.
What can I do to protect my Offer in Compromise from
being revoked?
If your Offer in Compromise has been approved, you need
to make sure the IRS does not revoke your Offer. At all
costs, make sure that you:
- File your taxes on-time for the next five years.
- If you cannot file by April 15th, request an
automatic extension. Definitely file your taxes by the
extension deadline.
- Pay your taxes on-time. If you owe, your taxes must
be paid in full by April 15th. Make estimated payments
or extension payments to make sure you don't have a
balance due.
If the IRS revokes your Offer in Compromise, they will
reinstate the full amount of your tax liability, add on
penalties and interest, and begin aggressive collection
efforts.
Can I pay "pennies on the dollar" to settle my tax
debts?
The marketing slogan, "pay pennies on the dollar," can
be misleading. In a successful offer in compromise, the
taxpayer pays less than the full amount taxes, penalties
and interest. However, the taxpayer must prove that the
amount he or she is paying is equal or more than the
reasonable collection potential
as determined by the IRS. The reasonable collection
potential, broadly speaking, is the IRS' best guess about
how much money you could come up with in the next 24
months to pay off your tax debts.
How many Offers in Compromise does the IRS approve
each year?
The Internal Revenue Service approves only a minority
of offer in compromise applications each year. In 2004,
the IRS approved 19,546 offers, about 16% of the total
number of offers received.
The key to a successful Offer in Compromise is making
sure that the IRS can process your application, and that
you submit complete backup documentation to support your
offer.
How long does it take to get an Offer in Compromise?
It will take one to two years to complete the Offer in
Compromise process. The time line for an Offer in
Compromise looks like this:
- Preparing the Offer in Compromise forms and backup
documentation (1-4 months)
- IRS Processing of your Offer in Compromise (13-18
months)
- Finalizing the Offer and Making Payment Arrangements
(1-3 months)
Based on the latest statistics, the IRS takes an
average of 380 days to process an Offer in Compromise
application. Your processing time may be shorter or longer
than this.
Is there a fee for submitting an Offer in Compromise?
The IRS charges a user fee of $150 to process an Offer
in Compromise. You must pay this fee whether you prepare
the Offer yourself or hire a tax professional. If you are
living below the poverty line, the IRS will waive the $150
fee if you submit Form 656-A to request a fee waiver.
I want to prepare an Offer in Compromise myself. What
do I need to do?
You will need to prepare IRS Form 433A and Form 656.
You will also need to collect an extensive set of backup
documentation.
If you are self-employed or are requesting an Offer for
you business taxes, you will need to prepare IRS Form 433B
in addition to Forms 433A and 656.
Where do I submit my Offer in Compromise paperwork?
Submit your Offer in Compromise application, forms, and
supporting documentation to the appropriate IRS Service
Center. See the IRS web site: Where to Mail Form 656,
Offer in Compromise.
What if I don't qualify for an Offer in Compromise?
If you don't qualify for an Offer in Compromise, you
should consider setting up an installment agreement to pay
off your tax debts. You will want to seek the help of a
tax professional to evaluate alternatives for handling
your tax debts.
