Offer in Compromise

Forms Needed:

• IRS Form 656 (PDF),
• IRS Form 656-A (PDF),
• Form 433-A (PDF), and/or
• Form 433-B (PDF)

Documentation:

• 3 months (or more) of paystubs, bank statements, credit card statements, mortgage statements, car loan statements, brokerage statements, 401k and other retirement account statements, personal expenses for health care, insurance, child care, housing, transportation, and so forth.
• Complete tax records for all years you owe the IRS, plus tax returns for at least the previous five years.

Recommended Tools:

• Quicken or QuickBooks to track your income and expenses.
• Spreadsheet template for Offer in Compromise calculation.

Eligibility Criteria

You may qualify for an Offer in Compromise if you meet the following essential requirements. No one is granted an Offer "automatically." Each Offer in Compromise case is decided on its individual merits.

Eligibility criteria for individuals requesting an Offer in Compromise:

• All required federal tax returns have been filed.
• You are current on your estimated tax payments or income tax withholding.
• You have a complete set of backup documentation.
• You do not have a pending bankruptcy case.
• Pay the $150 Offer in Compromise application fee.
• File IRS Forms 656 and 433A.

Additional requirements for businesses requesting an Offer in Compromise:

• File IRS Forms 656 and 433B.
• Employment tax returns have been filed on-time and paid on-time for the two previous quarters, and current with payroll tax deposits for the current quarter.
• IRS Form 433A may be requested for corporate officers, partners, or major shareholders.

For self-employed individuals(with a sole proprietorship or single-member LLC):

• File IRS Forms 656, 433A and 433B.
• Meet both sets of requirements above.

Documenting Your Financial Situation

The IRS Offer in Compromise forms require that you to document your entire financial situation. Once you submit Form 433-A and/or Form 433-B, the IRS will have a complete and accurate picture of your financial situation, including where you work, where you bank, and what assets you own. If your Offer in Compromise is not successful, the IRS will use this information to collect on your tax debts.

There are really two purposes for filling out Form 433-A and 433-B. The first purpose is to give the IRS a complete picture of your financial situation so they can determine the best method for collecting on your tax debt. The second purpose is to provide essential information for calculating the Reasonable Collection Potential on your tax debts. This calculation is made on a separate worksheet, which is not submitted to the IRS. (The IRS will calculate your Reasonable Collection Potential using their own worksheet, after making any revisions to your Form 433.)

The Reasonable Collection Potential calculation is the most important element in determining the success of your Offer in Compromise. Thus, you won't be able to tell if you might qualify for an Offer in Compromise unless you fill out Form 433 thoroughly, completely, and accurately.

Documents You Need

• Copies of IRS Form 433-A (for individuals), or 433-B (for businesses), or both (for self-employed individuals),
• 3 months of pay stubs,
• 3 months of bank statements,
• Most recent mortgage statement, brokerage statement, retirement account statement, and information about other long-term investments,
• Appraisals of your real estate, cars, trucks, and other personal property, and
• 3 months of household expenses (food, clothing, child care, health care, transportation, etc.).

Getting Ready for Form 433

Well in advance of submitting an actual Offer in Compromise, you need to do two things: get a rough idea if you qualify or not, and start collecting all your financial documents.

You (or your tax professional) are going to prepare about three or four versions of Form 433. The first version will be a very rough draft, giving you an idea if you are even eligible for an Offer in Compromise. The second and third versions will be more and more accurate reflections, based on collecting financial documents for a few months. The last version of Form 433 will be the version you actually file with the IRS. The final version needs to be thorough, accurate, and comprehensive.

Using Quicken or QuickBooks

You will need to track your spending on essential household expenses, such as housing, food, transportation and child care. You can keep track of your expenses using paper worksheets, but it will be easier to print out reports if you use personal finance software such as Quicken, Microsoft Money, or even a spreadsheet. If you run a business, consider investing in QuickBooks to keep track of your income and expenses.