When you are in debt to the IRS, any payment is one too many. Unfortunately, it’s pay-to-play. If you can't pay your taxes in full and on time or enroll in an installment agreement, you are left with few tools to help you reduce your tax burden.
An Offer in Compromise is available to a few people who can prove they can only pay part of their bill and want to have the rest forgiven. Getting the IRS to agree with an offer in compromise is difficult, and you definitely need help to apply.
How Long Can You Take to Pay Your Tax Bill?
Depending on the amount of your tax debt (including interest and penalties), you may be able to enroll in an installment plan that gives you up to five years to pay your taxes in full.
That means monthly payments with no skipping or skimping. If you miss a month, you will be charged for the balance all at once and are unlikely to be eligible for another installment plan anytime soon.
If you succeed in persuading the IRS to accept your offer in compromise, you could have up to ten years to pay off the amount you offer. Remember that interest continues to accrue until the balance is zero. Also, the IRS might temporarily suspend all collection activities during your offer evaluation period and, if they deny the offer, could still provide an additional 30 days during your appeal.
Are You Eligible?
First of all, you must have absolutely no hope of paying your entire tax bill, or you must prove that doing so would lead to severe financial hardship. The IRS wants to know more than how much you have in the bank. It expects you to consider all financial assets, including retirement accounts, available credit, and investments.
Also, the IRS isn’t interested if you cannot pay now. It wants to know if you can pay your taxes within ten years. That’s when the IRS period to collect expires.
When you develop your offer, you need to determine the absolute maximum you can pay monthly. Don't lie; the agency will find out. It has a very particular set of skills it has acquired over the sixteen decades the agency has been in existence.
Here’s an example of ineligibility:
- You owe the IRS $20,000
- You tell the IRS you can pay $500 monthly
- You have 100 months until the IRS collection status expires
You would not qualify for an offer in compromise because you just told the IRS you could pay up to $50,000 over the 100 months, much more than your tax bill. The agency concludes you have too much money to qualify for an offer in compromise, and your request is denied.
Threshold Requirements for an Offer in Compromise
Just to start on an offer in compromise, you must file all your required tax returns for all tax years, or at least the past six years. The IRS can require more if you are filing business taxes.
Next, you must be current on all estimated quarterly tax payments for the year, if applicable. If you are a business owner with employees, you must pay all federal tax deposits for the current year before submitting your offer.
You cannot be in open bankruptcy to get an offer in compromise accepted.
Once you have your offer finalized, you must submit all the paperwork along with the required application fee and initial payment. If you decide on a monthly payment plan, you now must make monthly payments until you hear back that the IRS accepted your offer.
What if you don't meet any of the requirements? The IRS turns you down flat without considering the offer. However, it can take up to a month for you to learn this.
The settlement time for an offer in compromise depends on whether the IRS accepts or rejects your offer after a complete evaluation. If the IRS accepts your offer, you can settle your tax debt in six to eight months. However, if the agency rejects your offer and then accepts it on appeal, it could take eight to twelve months.
How Much Should You Offer?
The IRS has a handy formula to determine how much they can squeeze out of the turnip that is your bank account. Your offer must be based on the money you (supposedly) have left over after paying your allowed expenses and how much income you have available from assets.
You can pay your offer amount in a lump sum (which is actually five or fewer installments) or as a periodic payment over 24 months. Failing to pay the installments on time is called defaulting on your agreement. The IRS can then require you to pay the remaining balance of the original tax debt plus penalties and interest calculated from the date of your agreement.
Timeline for an Offer in Compromise
Here is the timeline you can expect for your offer in compromise:
- Three to six weeks to determine a reasonable offer
- Four to eight weeks for the IRS to assign an examiner
- One to 18 months for the examination or to determine a reasonable collection period
- Six to eight months to receive an acceptance or denial of your offer
The process begins with your Income Certification for Offer in Compromise Application and the fee of $205. At the same time, you are expected to put down 20% of your offer. Then you wait. No government agency has won any land speed records for follow-though, so be patient.
If you are eligible for a low-income certification, you might be exempt from the down payment and continuous payments during the investigation period. You may also be exempt from paying an application fee.
Once the IRS assigns an examiner, it can still take months to receive a decision. The more complicated your taxes are, the longer it takes the IRS examiner to review them and figure out your total worth, including all income and assets. If you submit an offer in compromise due to doubt of collectability, the examiner must also determine your reasonable collection potential (RCP).
In a Nutshell…
The IRS has a ten-year statute of limitations on collecting tax debt. The collection period is suspended while your offer in compromise is under investigation. If the offer is denied, you still get another 30 days of grace if you appeal, and the IRS decides to accept your offer after all.
Waiting for the IRS to accept your offer in compromise can take months, during which you must make payments. Also, the agency expects $205 for the privilege of applying for an offer in compromise and a 20% down payment plus monthly payments until the offer is accepted or denied.
All of this can be stressful, disheartening, and complicated. Top Tax Defenders can make it less stressful by helping you navigate the process and interfacing with the IRS. Contact us to learn how we can help you.