If you find yourself burdened with tax debt, there is a potential solution that may significantly reduce or even eliminate your debt altogether: the IRS Offer in Compromise (OIC) program. This program allows you to make payments for a specific period of time, and the remaining balance can be forgiven.
While not everyone qualifies for the tax debt compromise program, you may be eligible if paying your total tax debt would result in serious financial hardship for you and your family. The IRS considers several factors to determine eligibility for the IRS Offer in Compromise program, including:
- Household income
- Total expenses, including other debts, housing costs, and living expenses
- Total assets, such as property equity, available cash, credit, and investments
- Ability to pay within a reasonable timeframe
Certain expenses, like college tuition, specific unsecured debts, and charitable donations, may not be counted toward your total expenses. Before submitting your application, it’s important to ensure that you have filed all required federal income tax returns, including those for years in which you earned taxable income but did not file.
When applying for an OIC, you need to propose the amount you can pay toward your tax debt within a certain timeframe. You have two payment structure options:
- Lump sum: This should be 20% of your proposed payment amount, which is typically less than your total owed balance.
- Payment plan: This involves making recurring payments of a set amount over a specific number of months.
To complete your IRS Offer in Compromise application, you must fill out and submit the following forms:
- Form 656 Offer in Compromise (required for all applicants)
- Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals
- Form 433-B Collection Information Statement for Businesses
You have the option to work with a tax professional who can assist you in calculating a viable offer, completing the necessary forms, gathering the required financial documentation, and submitting the proposal. Generally, there is a $205 fee when submitting the application, but if you meet the low-income threshold, this fee may be waived.
After submitting the forms and documentation, it is important to continue making payments as specified in your proposal until you receive confirmation of the IRS’s decision regarding your OIC application. If your proposal is accepted, you must file your taxes and make timely payments for at least five years to fulfill your offer and have your debt forgiven.
In the event that your proposal is denied, you have the option to submit an appeal within 30 days of receiving notice.