What is an Offer in Compromise?

If you have tax debt that you can't afford to pay, an offer in compromise (OIC) can help you settle your tax debt for less than what you owe. This program requires that you create a workable offer and present it to the IRS. Because of the formality of the process, and the forms involved, it is recommended that you use a tax professional, such as a CPA, a tax attorney, or an enrolled agent, to assist you in presenting your case to the IRS.

When Should You Use an OIC?

An OIC is the best option for people who can afford to pay at least a portion of their tax debt. If you are unable to pay, and will be unable to pay in the future, there are other strategies for you to use. An OIC requires that you pay a lump sum or a series of monthly payments. Sit down with your tax professional and take a look at your finances. Are you able to pay a lump sum now? If so, how much can you pay, and what percent of your total tax debt would your payment cover? If you have no ability to pay a lump sum, you can pay in monthly installments. Go over your budget with your tax professional and determine how much you can afford to pay each month.

Also keep in mind that if you choose to pay a lump sum, you must pay twenty percent of your proposed lump sum as a down payment. This gives you some breathing room to gather the money once your proposal is accepted, but reduces the risk to the IRS. If you choose to make monthly payments, you must begin paying as soon as the IRS accepts your proposed payment plan. Be sure to have the funds necessary for your down payment or your first monthly payment before you submit your plan to the IRS.

If you select a monthly payment plan, it must be structured one of two ways. First, you must pay off the proposed settlement amount over the course of twenty-four months, or second, you must continue paying over the remaining statute of limitations. For example, if your settlement amount is $5,000, you must pay approximately $209 each month, in order to satisfy the twenty-four month rule. However, if you can't afford that much each month, you must pay for the entire statute of limitations, which is usually ten years. If you have seven years left before the statute of limitations expires, and you cannot afford $209 a month, you must pay each month for the remaining seven years. Let's say you can only afford $25 a month. The IRS might accept that payment, but you must send them $25 each month for the next eighty-four months!

Keeping Your OIC Agreement

The most important thing to remember when you enter into an OIC with the IRS is that you must keep it, under any and all circumstances. If you fail to keep the terms, the IRS will consider the OIC withdrawn, and you will no longer be able to settle your tax debt in that manner. Make sure that you keep this in mind when you draw up your OIC with your tax professional. If you are at all uncertain that you will be able to raise the money for a lump sum payment, or that you will be able to pay your monthly payment each and every month, than you may want to re-think your OIC. Once it is accepted by the IRS, you are locked in to that plan.

Be honest with your tax professional and choose terms that you are certain that you can stick with. Dealing with the IRS can be a headache, so don't do it more than once! Settle your tax debt in a way that you can afford, and you won't have that dark IRS cloud hanging over your head any longer!

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