Taxes are a vital part of keeping the country running properly. However, there are times when individuals and families cannot afford to pay their income tax bill. If you find yourself in this situation, you have options that may be able to ease your financial burden.
The main option in this type of situation is an offer in compromise, a legal way to reduce tax debt. An offer in compromise (OIC) is a way of settling your tax debt by negotiating directly with the Internal Revenue Service (IRS). When you submit an offer in compromise, you send an offer to the IRS stating how much you are able to pay.
Because taxes are so important for government and public expenses, there are strict guidelines for who is eligible for a reduction in tax debt and which offers the IRS can accept.
Eligibility and Consideration
Before you make an offer to the IRS, check your eligibility and understand what the IRS takes into account.
The first test of eligibility is your reason for requesting a compromise.
The IRS will only consider an offer in compromise if it is for one of the following reasons:
- There is doubt as to whether the IRS correctly determined the amount you owe.
- There is doubt as to whether the debt is fully collectible. This means your assets and income are less than the amount you owe.
- The debt is correct, and you are able to pay the debt in full, but doing so would cause undue economic hardship. This is called effective tax administration.
If you are making an offer in compromise based on the second or third reason, the IRS will take other factors into account.
To determine whether you can pay, as well as how much you may be able to pay, the IRS generally looks at these four components:
- Your ability to pay
- Your income
- Your expenses
- Your assets
In general, the IRS only accepts offers that are equal to the maximum amount you’d be able to pay within a reasonable time period.
It will not consider your offer if any of the following are true:
- You are in an open bankruptcy proceeding.
- You have not filed required federal tax returns.
- You have not made required estimated tax payments.
- You are self-employed, have employees and have not submitted required federal tax deposits.
To find out if you are eligible for an offer in compromise, use the IRS’s pre-qualifier tool. However, even if you do qualify, there is no guarantee that your offer will be approved.
Submitting an Offer
When you apply for an offer in compromise, you’re responsible for completing and including several forms. In addition to the actual offer, you must include a collection information statement for individuals and/or businesses.
In most cases, you must also include a $150 application fee, as well as the first payment of your offer.
If you offer to pay one lump sum, your initial payment should be 20 percent of the total offer amount. Then, if you receive written notice that your offer has been accepted, you must pay off the remaining balance in five or fewer payments.
If you offer to pay over the course of a payment plan, your first payment should be the monthly amount suggested in your plan. Make this payment once a month until you receive notice from the IRS. At that point, if your offer has been accepted, continue making the monthly payments until your balance is paid in full. This must take no more than 24 months after the offer is accepted.
You do not need to pay a fee if your offer is based on a doubt of liability.
You also do not have to pay the application fee or initial down payment if you meet the Low Income Certification guidelines. This depends on the size of your family and your household’s monthly income, as well as where you live. For example, if your family is made up of three people and your household income is less than or equal to $3,997 per month, your initial fees are waived.
For step-by-step instructions and all the necessary blank forms, including qualifications for low income, read the IRS’s booklet on offers in compromise.
Appealing a Rejection
The IRS only accepts about a quarter of offers, so it’s likely your offer will be rejected.
If the IRS rejects your offer in compromise, you may appeal the decision. You have 30 days from the rejection date to file an official request for appeal. To do so, complete this form and follow the instructions included with your rejection letter.
An offer in compromise is often your best option for getting rid of tax debt you can’t afford to pay. However, you do have other options for reducing your financial burden and getting back on the right track.
If you’re not eligible for an offer in compromise or if your offer is rejected, look into debt solutions like settlement and consolidation. Often, they can save you money on other debts, freeing up cash to pay down your IRS debts.
Debt Consolidation and Debt Settlement
Debt consolidation and debt settlement are two terms often linked together, but they are two completely different ways to handle debt.
Debt consolidation means taking out a single loan to cover payments to multiple creditors. This is considered an acceptable way to get out of debt, but there are some drawbacks that should be investigated.
Debt settlement means offering a lump-sum payment to a creditor for less than what is owed. There are severe negative consequences for using this process to get out of debt.
If you can’t afford your bills, seek out professional help today. There are solutions for your debt problems.