The IRS's offer in compromise allows a tax payer to settle their debt for less than is owed. It is also the most difficult settlement to obtain. The only time it becomes an option is if all other methods of payment are exhausted or there is financial hardship. When it is determined that you can make payments on the entire amount, you will not be allowed to pay less. If you are fortunate enough to qualify, you must follow a series of steps in order to not lose the agreement.
Step 1 - Qualifying for the Offer in Compromise
It must be demonstrated that attempts at other types of payment have been made with no success. This includes inability to make installment payments directly to the IRS. It may also be required that an attempt be made to obtain a loan from a bank to pay the debt. When none of these options are available, you can then be considered for the OIC.
Step 2 - Applying for the Offer
You will need forms 656, titled Offer in Compromise and form 433-A which is Collection Information Statement. Both can be downloaded from the IRS's website. Form 433-A asks for information regarding your income and expenses. It's used to determine your eligibility for the offer. In the case that a tax liability is joint between a married couple, only one of each form and a one time filing fee of $150 is required. For a married filing separate situation, one form per person is necessary and the filing fee doubles to $300. You can find which office to mail the forms into via the website. You will also have to include payment for the initial amount to start the program.
Step 3 - Payment Options
There are three types of payments available for the taxpayer. Each needs to be read closely to ensure that you can hold up your end of the bargain. All payments made are non-refundable in the event that the IRS decides to revoke the agreement. Avoid revocation by sticking to the terms and making the payments. It is also required that you have your taxes filed by April 15th or have an extension filed. Any tax refund will be applied to the balance owed prior to the offer being accepted.
Consult a Legal Professional
There is a lot of documentation that is required by the IRS in order to approve the Offer in Compromise. The process also takes 13 months or more from start to finish. It's best to at least talk to a lawyer who specializes in reducing tax debts. You'll be informed of how the process works, what paperwork is needed and what to expect from the IRS as the case moves along. It'll also bring better results than trying to go at it by yourself.
