You may qualify to have your debt reduced significantly or erased completely through the IRS Offer in Compromise (OIC) program. Through this program, you can pay a certain portion of your tax debt over a period of time and have the remaining balance forgiven.
While this tax debt compromise program is not available to everyone with tax debt, you may qualify if paying your total owed back taxes would put you and/or your family in serious financial hardship. Some of the factors that the IRS uses to determine whether you qualify for IRS Offer in Compromise payments include the following:
- Your household income
- Your total expenses, including other debt as well as housing and living costs
- Your total assets, including property equity, cash, available credit, and other investments
- Your ability to pay within a reasonable amount of time
Some common expenses, like college tuition, certain unsecured debts, and charity donations/tithes, may not count toward your total expenses. Before you can complete your application, you must file all necessary federal income tax returns, including any for years you earned taxable income but did not file.
The OIC application is your proposal for how much tax debt you can pay in a certain amount of time. You have two payment structure options for an OIC proposal:
- Lump sum: This should be 20% of your proposed payment amount, which is less than your total owed balance.
- Payment plan: This is a set recurring payment amount made over a certain number of months.
You must fill out and submit the following forms as your IRS Offer in Compromise application:
- Form 656 Offer in Compromise, required for all applicants
- Form 433-A Collection Information Statement for Wage Earners and Self-Employed Workers
- Form 433-B Collection Information Statement for Businesses
You can choose to work with a tax professional who can provide Offer in Compromise assistance to help you calculate a viable offer, fill out the necessary forms, gather the required financial documentation, and file a proposal. You must typically pay a $205 fee when you submit your application. However, if you meet the low-income threshold, you may have this fee waived.
After submitting forms and documentation, it’s important to continue making payments as outlined in your proposal until you receive confirmation of the IRS decision regarding your OIC application. If your proposal is accepted, you must file your taxes and make payments on time for at least five years to stick to your offer and get your debt forgiven.
If your proposal is denied, you can submit an appeal within 30 days of notice.
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