What are your options if you owe the IRS more than you can afford to pay? Unfortunately, they are limited. You might consider making an offer in compromise.
What Is an Offer in Compromise?
This is when you submit an offer for less than the total amount you owe to the IRS. In extreme cases, the IRS has accepted as little as $1. Essentially, you are negotiating down your tax debt, but don’t think it’s that simple.
The IRS won’t simply forgive part of your debt because you ask. You must submit proof of your financial situation that details serious financial distress.
Do I Qualify for an Offer in Compromise?
In order to qualify, you must not have an open bankruptcy case. You must have filed all required federal tax returns. You must also be current with all estimated taxes and income tax withholding for the current tax year.
The most important qualifier is that you must be in serious financial distress. You will need to pay a $186 application fee when you submit Form 433-A or B for an individual or business. This form will ask you to prove your financial situation.
You will need to show proof that you do not have the funds to pay, nor do you have the means by which to earn the money. You can also provide proof that paying the debt will put you in further financial distress.
Offer in Compromise Types
There are two types of Offer in Compromise. You can offer a lump sum payment as your offer, or you can offer a down payment of at least 20% with a periodic payment plan. Be sure you qualify for an offer in compromise before you file for one. The IRS will apply your down payment or lump sum to your balance owed should they reject your application.
Offer in Compromise Pre-Qualifier Tool
The IRS has an online tool you can use to see if you qualify. The offer in compromise pre-qualifier tool will help you figure out your unique financial situation and determine exactly what you can pay or not pay.
The pre-qualifier tool will help you understand your financial situation in the same way the IRS will look at it. If you truly are suffering severe financial distress, the pre-qualifier tool will be a critical step in getting your offer in compromise accepted.
Hire a Tax Professional
It may sound counter-intuitive to spend money you likely cannot afford. Yet hiring a professional to manage this complicated process has its benefits. They know the laws, how to submit the forms, and can offer you sound advice on how to proceed based on your particular financial situation. The last thing you want to do is make an offer in compromise that is accepted, only to realize you cannot afford the payments.
An offer in compromise is a great way to negotiate down your tax debt, but it isn’t for everyone. Be sure to research your own situation to be certain you qualify. Make sure you fill out all the requisite forms and create an offer that works for you.