Submitting an Offer in Compromise is the process in which a taxpayer may reduce their Internal Revenue Service or State tax debt by negotiating with the taxing agency to accept an amount less than the actual amount they owe.
The Offer in Compromise works best for an individual who has few assets and not much disposable income.
If you wish to file an Offer in Compromise, it is best to look very carefully at all aspect of the case including reviewing the bankruptcy statutes so that you don’t inadvertently extend the statute of limitations.
This process is often referred to as settling one’s taxes for “pennies on the dollar”. The IRS or State has the authority to settle or compromise” Federal and State tax liabilities by accepting less than full payment under certain circumstances. A Federal tax debt may be legally compromised under one of the following conditions:
- 1.Doubt as to Collectability-doubt exists that a taxpayer could pay the full amount of tax owed within the collection statute.
- 2.Doubt as to Liability-doubt exists as to whether the tax should have been assessed to the taxpayer
- 3.Effective Tax Administration-there is no doubt the tax is correct, and no doubt that the amount owed could be collected, but an exceptional circumstance exists that allows the IRS to consider a taxpayer’s offer.
To be eligible for this type of compromise, the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable.
The majority of the taxpayers fall into the first category (i.e. you owe the tax and agree as such but you cannot pay the IRS the full amount of what is owed).
For the IRS to consider an Offer in Compromise, you must at least offer to pay an amount equal to the quick sale value of all your assets plus all the money the IRS “believes” they can collect from your future disposable income for a period of 12 or 24 months (this time period was reduced from 48 or 60 months as part of the Fresh Start Initiative which has passed but the reduced time frame remains at the lower amount).
There are three basic plans for the payment of an Offer in compromise
An offer may be paid upon acceptance in full or over 5 months once an offer has been accepted. In order to pay off the offer using either of the above mentioned options, the taxpayer must submit a non-refundable down payment of 20% of the full offer amount with the paperwork initially.
There is also a Periodic Payment option which requires no down payment but requires regular payments be made throughout the process of determining if the offer will be accepted. In this case the offer must be paid in no more than 23 monthly payments.
A taxpayer submitting an offer must include as part of his/her offer the realizable value of their assets (quick sale value) plus the total amount that the IRS could collect over a 12 month period.
In determining the amount of the offer, the IRS uses a quick sale value of assets, and the amount that can be collected from future income.