Offer in Compromise

Situations arise in which taxpayers can not meet the amount of money (i.e. tax liability) that they owe the IRS. If this situation occurs, then taxpayers have the choice of making an Offer of Compromise to the IRS to help relieve them of some portion of the full tax liability they owe. Therefore, this agreement of an Offer in Compromise between the IRS and taxpayer will result in lower tax liability then the full amount that was originally due. This will only result if the IRS accepts the taxpayers Offer in Compromise.

Most individual and business taxpayers who owe income taxes, payroll taxes, penalties or interest may submit an Offer in Compromise. When a taxpayer submits an Offer in Compromise to the IRS by filling out Form 656, Offer in Compromise, along with Form 433-A, Collection Information Statement, one of three conditions must me met in order for the taxpayer to qualify for consideration:

Doubt as to liability – This would occur when doubt exists that the assessed tax is correct
Doubt as to Collectability – This would occur when doubt exists that the taxpayer could pay the full amount of tax owed
Effective tax Administration – This would be a situation in which a circumstance would arise where the taxpayer must prove or demonstrate that the collection of the tax would create an economic hardship or would be unfair

There are certain terms and conditions in an Offer in Compromise Contract that a taxpayer must agree to: Pay the offer amount that is calculated using the Form-A Worksheet, File your tax returns on time and pay taxes due 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, and finally 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 do not go by the rules of the contract, the IRS can revoke the Offer in Compromise and make the taxpayer pay the original full amount of tax liability owed.

The Offer in Compromise process often takes one to two years to complete. The timeline involves preparing the Offer in Compromise forms and the backup documentation, which can take between one to four months. IRS processing of the taxpayer offer can be from thirteen to eighteen months, while finalizing the offer and making payment arrangements can be one to three months. Recent information has shown that the IRS has taken 380 days to process applications. When submitting the Offer in Compromise the taxpayer must pay a $150 IRS processing fee. If the taxpayer lives below the poverty line they can request a fee waiver by submitting Form 656-A. The IRS on average approves 10 to 20 % of applications that are submitted. The importance of having a successful Offer in Compromise is making sure that the IRS can process the application and that the taxpayer has submitted complete backup documentation to support their offer.