Getting letters from the IRS is no fun. It can be downright scary, especially if you know why they’re contacting you. You know that you owe them money, but you also know that you don’t have the funds to pay them.
It may seem that all you can do is nothing, but that’s the worst thing to do. Doing nothing will result in tax levies or garnishments.
Fortunately, taxpayers who are behind on paying their taxes have options. One of them is an offer in compromise. It’s a form of debt forgiveness where you can settle your debts with the IRS.
Read on to find out what an offer in compromise is and understand exactly how it works.
What is an Offer in Compromise?
The IRS has a pretty standard collections procedure. They never call or threaten to put you in jail for back taxes. They will only send out letters.
If these letters go unanswered, you’ll get certified letters notifying you of your tax obligations with penalties and interest. They’ll eventually send out letters that notify you of a bank levy or wage garnishment.
You do have some options to pay back your taxes. You can go on a payment plan or you can offer to pay less than what is owed, which is an offer in compromise. For example, you owe $10,000 in taxes. You can offer to pay $2000 of that in installments over the next six months.
This is a lengthy procedure and you have to qualify for it first. The whole offer in compromise process can take anywhere from 6 – 24 months. Not only that, you have to fill out the application and get approved. That’s not a certainty, as only 40% of offers are approved by the IRS.
The good news is that when you do file an offer in compromise, the tax collections stop.
How to Qualify for an Offer in Compromise
The first place to start to find out if you’re eligible for an offer in compromise is to visit the IRS website. This will give you a general idea as to what’s possible.
You have to have all of your taxes filed and be up to date on any estimated tax payments. You also cannot be in the middle of a bankruptcy. These things will automatically disqualify you.
If you’re not sure if you qualify or not, even if the website says that you don’t qualify, you want to get a second opinion from a tax professional. They’ve handled enough cases where they can easily tell if you qualify or not.
Requesting an Offer in Compromise
You’ll have a lot of forms to fill out if you do qualify for an offer in compromise. You have about 20 pages of documents to fill out. These include:
- Form 656, Offer in Compromise
- Form 433-A, Collection Information Statement for Wage Earners and Self-Employed,
- Form 433-B (if you have a business), Collection Information Statement for Businesses
- Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment (To get the $186 application fee waived)
You’ll need to make sure that these forms are completely filled out. One blank line is enough cause for your application rejected.
Have a Tax Expert Help You
This is not a process you want to handle on your own. One small error can result in denial. You will have an offer in compromise case manager assigned to you.
An advantage to having a tax expert on your side is that they may already have worked with your case manager before. The CPA will know what they are looking for in an application and they can follow up on your behalf should any questions arise.
What if the Offer is Rejected?
The IRS will do one of three things when they receive your offer. They’ll either accept it, ask for more information, or reject it.
There’s a good chance that your offer will be rejected on the first attempt. If that happens, what are your options?
You have 30 days to appeal the offer. You’ll have to submit another offer and correct your forms if there are any errors.
Getting an Offer in Compromise Approved
The offer in compromise process is an emotional one for many people. It may also be a long wait until you hear anything.
The IRS will communicate with you via mail. Some of these pieces of mail may be time-sensitive, so you want to make sure that you check your mail and respond right away.
If you provided them with follow up information, then you should receive a decision from them. This will be a letter that says your offer was approved.
At that point, you have to comply with the terms of the offer in compromise agreement. You’ll have to begin the installment payments that you agreed to in your offer.
You also have to file your taxes and pay all of your taxes on time for the next five years. It’s also your responsibility to update the IRS on any address changes.
The important thing to know about an offer in compromise is that your debt doesn’t completely go away. If you had $10,000 in tax debt and paid $2000, you still carry an $8000 balance for the next five years.
Any tax refunds you’re owed for the next five years will be applied towards that balance.
The IRS can cancel your agreement if you don’t abide by these terms. At that point, you’ll be stuck at the beginning of the process.
Stuck in Tax Debt? Get Help Now
It’s scary and challenging to be in tax debt. You do have options to get out of tax debt, though it may not always feel that way.
Filing an offer in compromise is a great way to relieve your tax debt and get a fresh start. It’s a long process that does require a certain amount of expertise.
If you want to know more about getting an offer in compromise approved, contact us today.
