What Is an Offer in Compromise?
With an offer in compromise, the IRS agrees to allow a taxpayer to pay off less than the full tax debt he or she owes. To qualify for an offer in agreement, however, you must meet one of three criteria:
- Doubt as to Liability. If you can prove that a mistake was made and you do not actually owe as much in taxes, the IRS will allow you to pay off the correct, lower amount instead.
- Doubt as to Collectibility. In this scenario, you must show the IRS that you cannot feasibly pay off your tax debt because you don’t have the income or assets to do so. This is the most common type of offer in compromise.
- Effective Tax Administration. If your taxes owed are correct and your income is sufficient but paying off the full tax debt would cause you significant financial stress, the IRS might grant you an offer in compromise to prevent you from experiencing economic hardship.
You must also be current on all tax returns and not be in the process of filing for bankruptcy. Then, if you believe you fall into one of these categories, you can begin to take the necessary steps for being granted an offer in compromise.
Steps for Submitting an Offer in Compromise
To submit a doubt as to liability offer, you must fill out Form 656-L and send it to the IRS. For doubt as to collectibility and effective tax administration, you must fill out Form 656-B plus the appropriate Form 433 and any supporting documents, and pay the application fee. You don’t have to pay a fee when you submit the doubt as to liability form or if you qualify for a low-income exception. If your application is missing any documents, it will be returned as incomplete.
You can make one of two types of offers:
- A Lump Sum Cash Offer. You commit to paying an initial 20% of the revised amount and paying off the rest of the debt in no more than five installments over two years from when the IRS accepts your offer.
- Periodic Payment Offer. You pay off your adjusted tax debt in at least six payments over two years from when the IRS accepts your offer.
You must begin making these payments as soon as you submit the offer in compromise forms and continue making them while the IRS determines whether to accept or reject your offer. This could take as long as two years. If two years have passed without a decision, however, your offer gets granted automatically.
What to Do if the IRS Accepts Your Offer
The IRS will accept your offer if it has come to the conclusion that it will not reasonably be able to collect the full amount you owe. The IRS determines this likelihood based on its “reasonable collection potential” (RCP) formula and guidelines. According to the Taxpayer Advocate Service’s 2017 Annual Report to Congress, the IRS accepts less than half of the offers it receives annually.
If the IRS accepts your offer in compromise, you will receive a written letter notifying you of this decision. An offer in compromise letter of acceptance typically includes:
- The date of acceptance.
- Conditions of the offer.
- Where to send payments.
You then have 30 days to make your initial lump sum payment. Upon receiving this payment, the IRS will release your tax lien. You must keep paying your taxes for the next five years or until you’ve paid off the offer amount.
What to Do If the IRS Rejects Your Offer
You’ll also receive a written letter if the IRS rejects your offer in compromise. An offer in compromise letter of rejection will include:
- The rejection notification.
- Reason for rejection.
- Your right to an appeal.
You have 30 days from the letter’s postmark to file an appeal using Form 13711, plus documents explaining your reason for appeal. You cannot request an appeal if your offer was rejected because:
- You had not filed your tax returns.
- You’re in the process of filing for bankruptcy.
- You didn’t include all the necessary information or fees.
- You sent the offer in merely to delay tax payment.
If you do qualify for an appeal, you will need to hire a qualified attorney to help guide you through the process in the Court of Appeals.
How a CPA Can Help
Hiring a CPA to help you with your offer in compromise can streamline the process and make the experience less stressful for you. These professionals are capable of navigating the complex tax code, ensuring you have all the appropriate paperwork and documentation, and communicating directly with the IRS for the best outcome. They can provide you with samples of all the forms you’ll need and the correspondence you can expect, as well.
Contact Hopkins CPA at (361) 360-3855 or email us at Info@HopkinsCPA.Tax to determine if you qualify for an offer in compromise. We’ll help guide you through this process so you can pay off your tax debt as easily as possible.