Facing an allegation of tax fraud or even an allegation of non-payment of taxes can wreak havoc in your personal and professional life. There are a number of ways to go about resolving a tax debt. One of those ways is to make an IRS offer in compromise.
What’s an offer in compromise?
An offer in compromise is an agreement between a taxpayer and the IRS. It allows the taxpayer to settle a tax debt for less than what they owe. The taxpayer and the IRS come to an agreement that allows the debtor to pay an agreed upon amount in exchange for giving the taxpayer a clean slate.
Requirements to qualify
Not everyone qualifies to make an offer in compromise. If you don’t meet basic requirements, the IRS isn’t even going to consider your offer. First, if the IRS thinks that there’s a chance they can collect the tax debt, they’re not going to agree to compromise. If it’s simply a matter of garnishing or executing on assets that you don’t want to voluntarily pay, they’re going to conclude that it’s worth the trouble to try and collect the total amount of the debt.
The IRS looks at your reasonable collection potential. That’s the amount that they think you can pay. They base this amount on your income and assets. They make allowances for what they consider reasonable living expenses. If the IRS believes they can’t collect the full amount of your debt, they’ll consider whether you meet the other eligibility requirements.
In addition to having a reasonable collection potential that’s less than what you owe, you may not be in an active bankruptcy proceeding when you file for an offer in compromise. You must also file all of your federal tax returns by the time that you make the offer. Business applicants must make the required federal deposits. If you meet all of these qualifications, you may qualify to make an offer.
How to file an offer in compromise
A taxpayer initiates an offer in compromise by filing specific forms with the IRS. In most cases, there are several forms that you may need to file:
Form 656 – Offer in Compromise
Form 433-A – Collection Information Statement for Wage Earners and Self-Employed Individuals
Form 433-B – Collection Information Statement for Businesses
Supporting documentation like relevant account statements
You may not need both Form 433-A and Form 433-B. What you need in your case depends on the exact circumstance of your income. You must also pay an application fee of $168 in most cases.
What’s the purpose of an offer in compromise?
There are multiple reasons that the IRS considers making an offer in compromise. First, the IRS believes that it’s better to get something than nothing. On behalf of all of the taxpayers, if they can’t collect the entire debt, they think it’s better to at least collect part of it.
In addition to collecting something on behalf of taxpayers, another reason that the IRS allows taxpayers to make an offer in compromise is to return taxpayers to the paying public rather than having them continue in the ranks of non-paying debtors. The IRS believes that their system for an IRS offer in compromise is in the best interests of the public and administration of government.
What if it’s not clear what I owe? Do I need to hire an IRS tax fraud lawyer?
If there’s doubt as to the amount of your tax liability, the procedures might be a little bit different. For example, you don’t need to pay the filing fee if you dispute the amount of your tax liability. One of the reasons that the IRS may agree to an offer in compromise is to resolve a dispute about the amount of your tax liability.
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