Along with death, payment of taxes is often quoted as one of the immutable facts of life. Of course, most people’s feelings are ambivalent about paying taxes. Everyone benefits from the services provided by tax payers’ money, but nobody relishes the prospect of parting with hard earned income. Even worse still are the situations in which it simply isn’t possible to pay the full amount expected by the government. What can be done when an “unstoppable” lack of financial resources comes up against an “immovable” IRS tax amount?
Actually, there is a little-known legal prerogative open to qualifying tax payers who find themselves in the situation of being unable to pay a large tax debt. Known as an Offer in Compromise, the government concedes to allowing, and hopefully accepting, an offer of a portion of the tax liability owed. In fact, the IRS has been known to accept as little as one percent of the total amount originally owed. It is not a magic solution, however. There are a number of facts and processes to keep in mind that can help to make this a viable and successful option.
Everyone would, of course, love to pay only a fraction of their taxes. However, before jumping into the process, it’s important to review just who qualifies. The IRS allows essentially one of two different qualifying situations.
- The IRS has reason to believe that it cannot, now or in the foreseeable future, collect the total amount owed.
- Truly exceptional circumstances prevail, making it an economic hardship, unfair, or an inequality to pay the tax bill in full.
For those who find themselves qualifying for an Offer in Compromise, a formal process now begins. Unfortunately, it’s not a process that is free. $150 must accompany a completed IRS Form 656, Offer in Compromise, along with Form 433-A, the Collection Information Statement.
During the processing of the application, which could take over a year, the IRS will likely require large amounts of additional information, such as pay stubs, vehicle registrations, bank records, and countless other bits of financial information.
Those who are approved, which can be less than %20 of the total requests received for a given year, are then expected to fulfill a few requirements. If these requirements are not met, the government can revoke the Offer in Compromise.
- The amount offered in the Offer in Compromise must, of course, be paid as offered.
- Filing tax returns and paying any amounts owed is particularly important over the next five years.
- The IRS gets to keep any refunds, payments, or credits from the time prior to submitting the Offer in Compromise through the time of processing.
Things to Consider
There are indeed a number of benefits to an Offer in Compromise, particularly since it is usually a last resort. However, there are also other factors to take into consideration before making any final decisions.
- The $150 fee is not refundable. If an applicant is denied or an approved request is later revoked, the money stays with the IRS.
- With all of the detailed information supplied to the IRS during the process, the disclosure of assets will enable the government to more easily increase the effectiveness of any debt collection efforts against the applicant.
- It’s vital that anyone requesting an Offer in Compromise remember that interest continues to accumulate during the entire process. If a deal is not made, the amount owed could end up being more than ever due to the interest.
Obtaining an Offer in Compromise from the IRS for the payment of a large tax obligation can be a time consuming challenge. However, for those who have exhausted all other avenues and options, it can be the opportunity to pay a debt owed to the government, and, in a way, get a fresh start in the ongoing relationship with the IRS and in this case our tax settlement advisor can help you out.