Wealth & Risk Management Blog

William Byrnes (Texas A&M) tax & compliance articles

Can’t Pay Your Tax Debt? What is an Offer in Compromise?

Posted by William Byrnes on May 28, 2014


What is an Offer in Compromise?

An offer in compromise allows a taxpayer in certain situations to settle a tax debt for less than the full amount of that debt.  An offer in compromise may be a legitimate option when a taxpayer cannot pay a full tax liability, or paying the full tax liability will create a financial hardship.

The IRS considers the taxpayer’s following unique set of facts and circumstances:

  • Ability to pay;
  • Income;
  • Expenses; and
  • Asset equity.

The IRS states that it will generally approve an offer in compromise when the amount offered represents the most that the IRS thinks that it can expect to collect within a reasonable period of time.

Who is Eligible for an Offer in Compromise?

Before the IRS is able to consider an offer in compromise from a taxpayer, the taxpayer must first be current with all filing and payment requirements.  A taxpayer is not eligible if the taxpayer is in an open bankruptcy proceeding.  Use the Offer in Compromise Pre-Qualifier to confirm eligibility and to prepare a preliminary offer in compromise proposal.

How to Submit an Offer in Compromise?

Step-by-step instructions and all the forms for submitting an Offer in Compromise may be found in the Booklet Form 656-B (PDF).  The Offer in Compromise must include:

How to Select a payment option?

The initial payment will vary based on the offer and the payment option chosen with the offer:

  • Lump Sum Cash: Submit an initial payment of 20 % of the total offer amount with the application for Offer in Compromise.  Wait for written acceptance, then pay the remaining balance of the offer in five or fewer payments.
  • Periodic Payment: Submit the initial payment with the application. Continue to pay the remaining balance in monthly installments while the IRS considers the offer in compromise.  If accepted, continue to pay monthly until it is paid in full.

If a taxpayer meets the Low Income Certification guidelines, then the taxpayer does not need to send the application fee or the initial payment and will not need to make monthly installments during the evaluation of the offer in compromise.

What Happens During the Evaluation of the Offer in Compromise?

  • Non-refundable payments and fees will be applied to the tax liability, payments may be designated to a specific tax year and tax debt;
  • A Notice of Federal Tax Lien may be filed;
  • Other collection activities are temporarily suspended;
  • The legal assessment and collection period is extended;
  • Make all required payments associated with the offer;
  • Payments on an existing installment agreement may be temporarily suspended; and
  • The Offer in Compromise is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date.
If the offer is accepted If your offer is rejected
  • Meet all the Offer Terms listed in Section 8 of Form 656, including filing all required tax returns and making all payments;
  • Any refunds due within the calendar year in which your offer is accepted will be applied to the tax debt;
  • Federal tax liens are not released until the offer terms are satisfied; and
  • Certain offer information is available for public review at designated IRS offices.
  • A taxpayer may appeal a rejection within 30 days using Request for Appeal of Offer in Compromise, Form 13711 (PDF).

2014_tf_on_individuals_small_businesses-m_1For over 110 years, National Underwriter has provided fast, clear, and authoritative answers to financial advisors pressing questions, and it does so in the convenient, timesaving, Q&A format.  “Our brand-new Tax Facts title is exciting in many ways,” says Rick Kravitz, Vice President & Managing Director. “First of all, it fills a huge gap in the resources available to today’s advisors. Small business is a big market, and this book enables advisors to get up-and-running right away, with proven guidance that will help them serve their clients’ needs. Secondly, it addresses the biggest questions facing all taxpayers and provides absolutely reliable answers that help advisors solve today’s biggest problems with confidence.”

Robert Bloink, Esq., LL.M., and William H. Byrnes, Esq., LL.M., CWM®—are delivering real-life guidance based on decades of experience.  The authors’ knowledge and experience in tax law and practice provides the expert guidance for National Underwriter to once again deliver a valuable resource for the financial advising community,” added Rick Kravitz.

Anyone interested can try Tax Facts on Individuals & Small Businessrisk-free for 30 days, with a 100% guarantee of complete satisfaction.  For more information, please go to www.nationalunderwriter.com/TaxFactsIndividuals or call 1-800-543-0874.

For an indepth analysis of deductions for donations to U.S. charities (and the government’s policy encouraging or discouraging these donations), download my article at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2304044

If you are interested in discussing the Master or Doctoral degree in the areas of financial services or international taxation, please contact me: profbyrnes@gmail.com to Google Hangout or Skype that I may take you on an “online tour” 

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