First In A Series
You’ve been hit with a huge tax bill. You just don’t have the means to pay it. Googling leads you to some IRS links that are impossible to decipher without a degree in accounting or tax law. You have a tax bill hanging over your head. What are your options?
Today we’re going to take a closer look at the Offer In Compromise, one of the IRS programs designed to lessen the burden of a large tax bill.
While it’s best to consult with a tax pro, this post will offer a general explanation of the Offer In Compromise and how the program works. Only a qualified tax pro will be able to advise you if this program is an option for you. In the meantime, the IRS does offer an online tool to help you calculate roughly how much you’ll owe under this program.
Your tax pro, after evaluating your particular financial circumstances, will be able to tell you whether or not an Offer In Compromise will be the best option for you.
You and your tax pro will need to file IRS form 656 and the Collection Information Statement, along with any supporting documentation, filing fee, and initial payment. The IRS filing fee is $186.00, but if your monthly income falls below poverty level, you can file for an exemption. Your tax pro will attach an additional worksheet to the 656 form.
As with any dealing with the IRS, there forms to file and requirements to satisfy. The IRS will only consider two scenarios when evaluating your application:
- There is some doubt as to whether the IRS will be able to collect this debt from you, now or in the future. The technical term for this scenario is “doubt as to collectivity.”
- Whether or not paying the tax bill will wipe you out financially, otherwise known as ” economic hardship.” Other instances within this scenario would also include whether or not payment of the tax bill would be unfair or “inequitable” in IRS terms.
In either instance, you will need to make some form of payment at the time your tax pro files the necessary forms.
- If you will be making five payments over five or fewer months, you must send a minimum of 20% of the balance due with your application.
- If you will need more than five months to pay your tax bill, you will need to include the first payment installment with your forms. You must also continue to make payments on time while your application is being evaluated by the IRS.
If you are married and live in community property state, the IRS may request the your Collection Information Statement includes information on your spouse, even if the tax debt is yours alone.
The Offer In Compromise process requires what seems like mountains of documentation in addition to the customary forms. Don’t be surprised if you’re asked to submit bank records, pay stubs, vehicle registration information and other documents This process, from gathering the required documents, duplicating them and getting them sent off to the IRS, can be time-consuming. Even with all those documents, there is no guarantee your Offer In Compromise request will be approved.
Interest on the tax bill will continue to accrue during the negotiation period, which means you can end up owing more than your original balance.
At last count, only 25% of Offer In Compromise proposals were approved by the IRS. Your tax pro can help you resubmit your proposal and work with the IRS on your behalf.
As with any serious payment matter involving the IRS, it’s always best to consult with a tax pro who can walk you through this sometimes complex process. They will be able to help you complete the needed forms and will keep you updated as your case progresses through the IRS channels, and will assist you with any follow-up information required by the IRS. Better yet, they will negotiate on your behalf, taking the sting out of what can be a scary process for some taxpayers.
Tomorrow: a closer look at the Installment Agreement.