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Offer in Compromise

Essential Information on IRS Offers in Compromise

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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 five 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. You will also need to calculate the payment amount you offer to the IRS using the Form 433-A Worksheet.

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. As of May 2010, the IRS has accepted about 24% of offers. (Source: National Taxpayer Advocate, 2011 Objectives Report to Congress.)

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.
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