If you owe back taxes to the IRS and cannot afford to pay them, you may be eligible to participate in an IRS program known as "Offer in Compromise." Much like a debt settlement program for consumer credit debt, the Offer in Compromise program allows taxpayers to settle their tax debt for much less than they owe.
If your tax debt is seriously delinquent, the IRS likely assumes that they will not be able to collect on the debt. This is especially true if you do not have any significant property that they can place a lien or levy on, meaning that the IRS is faced with the choice between continuing to receive nothing, or receiving a small amount of money.
If you owe the IRS back taxes, but have not yet been contacted by an IRS revenue officer, you may think that your tax delinquency is going unnoticed and you do not have to pay your bill. Nothing can be further from the truth. The IRS can and will make every attempt to collect the debt, including putting a levy or lien on your vehicle, home, or other property. Instead of letting your home become subject to IRS seizure, you can negotiate your bill down through the Offer in Compromise program.
The Offer in Compromise program can help you settle your tax debt for pennies on the dollar. Research has found that program participants typically pay less than 20% of the original amount they owed to the IRS, and the full debt is forgiven upon payment. Instead of living in fear of having the IRS take your car or even your home to satisfy your tax debt, satisfy your debt for less with an Offer in Compromise.
>>Click Here to Read About Pros and Cons of an Offer in Compromise
If you can't pay your full tax debt, or paying it would create a serious financial hardship, the IRS will consider your individual circumstances to decide if and how much they'll be willing to accept from you as an offer. They will look at your ability to pay, your income, your expenses, and what assets you own.
You can apply for an Offer in Compromise if you:
>>Click Here to Learn How to Qualify for An Offer in Compromise
First you submit your offer to the IRS. Though the IRS has the ultimate power to accept or reject your offer, you can take steps to increase the chances your Offer in Compromise will be accepted. While they are considering whether to accept your offer, your non-refundable payments and fees are applied to what you owe. You can choose which specific tax year and/or tax debt your payment/fee will be applied to.
During the time before the IRS accepts or rejects your offer, they may file a Notice of Federal Tax Lien, but they will stop all other collection activities until a decision is made. The IRS will also extend the deadlines for collection and legal assessment. However, you will be required to continue to make all required payments, as proposed in your offer. If no decision has been communicated within two years of the IRS getting your offer, then your offer is automatically accepted.
You can improve your chances of having your Offer in Compromise accepted by making sure you've done everything you need to do to prepare your offer correctly.
When submitting an Offer in Compromise, you'll want to make sure your offer is in line with your reasonable collection potential. This means, you've been fair in estimating what you can actually afford to pay. If the IRS thinks you can afford to pay more than you've offered, they may reject your offer. You can use the same formula the IRS uses to determine your reasonable collection potential.
>>Click Here to Learn How to Submit An Offer in Compromise
There are essentially two payment options with the Offer in Compromise program: making a lump sum payment or making periodic payments. The way you pay will depend on your offer and the payment option you choose.
If you pay a lump sum of cash, you will need to send an initial payment of 20% of the total amount you're offering with your application. You will receive a written notice that your offer has been accepted (if it is accepted.) Then you will have to pay any remaining amount owed on the offer in five payments or less.
If you opt for the periodic payment option, you'll need to submit your first payment with your application. You will continue to make payments the remaining amount each month, while the IRS is deciding whether to accept your offer. If your offer is accepted, your monthly payments will continue until the offer amount is fully paid off.
The rate of acceptance for Offers in Compromise varies by year. However, as a data point, in 2022 the IRS receive 36,022 offers and accepted 13,165 of them. That's an acceptance rate of 36.5%. The chances of acceptance are higher though if you prepare a strong offer that fairly reflects your ability to pay and includes all necessary information and documentation to support your offer. This is where have an experienced tax professional guide you can be beneficial for your case.
>>Click Here to Learn 6 Common Offer in Compromise Mistakes to Avoid
If your Offer in Compromise is rejected by the IRS, you still have several options to pursue if you feel their decision is incorrect:
Appeal the Decision: You can appeal the rejection within 30 days of receiving the rejection letter. You would need to submit a written appeal explaining why you disagree with the rejection and provide any supporting documentation.
Request Reconsideration: If there were errors in the rejection decision or if you have new information or circumstances that could affect the decision, you can request reconsideration. This involves contacting the IRS and providing the necessary documentation to support your case.
Modify and Resubmit: You can modify your offer and resubmit it for consideration. This could involve adjusting the amount you're offering to pay or providing additional documentation to support your offer.
Explore Other Options: If an OIC is not feasible, you can explore other options for resolving your tax debt, such as setting up an installment agreement or requesting currently not collectible status if you're facing financial hardship.
Consult with a Tax Professional: It's often beneficial to seek guidance from a tax professionals, like the Top Tax Defenders team, who can review your situation and provide advice on the best course of action.
Remember to act promptly and carefully review the reasons for the rejection to determine the most appropriate next steps.
>>Click Here to Learn How to Appeal Your Rejected Offer in Compromise
If you're interested in settling your tax debt for less than you owe through the Offer in Compromise program, having an experienced tax resolution firm to help you navigate the process can help you get the best possible settlement for your situation. Top Tax Defenders has 27 years of experience working with the IRS to help clients find a solution to their tax problems, including negotiating debt down through an Offer in Compromise. We'd be happy to provide a free consultation to see if we can help you.
>>Click Here to Read Real-Life Success Stories from Our Clients
An Offer in Compromise is an IRS program that allows eligible taxpayers to settle their tax debt for less than the full amount owed. The IRS considers it when full payment would create financial hardship or when the debt is unlikely to be collected in full. Research shows most participants pay less than 20% of their original balance.
The IRS would rather collect something than nothing. If you have no significant assets to lien or levy and cannot realistically pay the full debt, accepting a reduced settlement is more practical than continuing collection efforts with little chance of recovery. The program gives the IRS a guaranteed partial payment rather than an uncertain full one.
To qualify, you must have filed all required tax returns, made all required estimated tax payments, not be in an open bankruptcy proceeding, and, if you are an employer, be current on tax deposits for the current and past two quarters. The IRS then evaluates your income, expenses, assets, and ability to pay to determine an acceptable offer amount.
The IRS uses a formula based on your Reasonable Collection Potential. This is an estimate of what they could realistically collect from you based on your assets, income, and allowable living expenses. If your offer falls below that figure, it will likely be rejected. Matching or slightly exceeding your Reasonable Collection Potential gives your offer the best chance of acceptance.
There are two options. With a lump sum payment, you submit 20% of your offer amount with your application and pay the remainder in five payments or fewer once accepted. With periodic payments, you submit your first payment with the application and continue monthly payments while the IRS reviews your offer, then until the full offer amount is paid.
Most collection activity stops while the IRS reviews your offer. However, the IRS may still file a Notice of Federal Tax Lien during this period. Collection deadlines are extended for the duration of the review. You must continue making any payments proposed in your offer throughout the process. If no decision is made within two years, your offer is automatically accepted.
Acceptance rates vary by year. In 2022, the IRS received 36,022 offers and accepted 13,165, an acceptance rate of approximately 36.5%. Offers that accurately reflect the applicant's ability to pay and include complete supporting documentation have a significantly higher chance of acceptance than incomplete or inflated submissions.
You have several options. You can appeal the rejection within 30 days by submitting a written explanation with supporting documentation. You can request reconsideration if new information affects your case. You can modify and resubmit your offer with a revised amount. Or you can explore other options such as an installment agreement or Currently Not Collectible status.
No. All required tax returns must be filed before the IRS will consider an Offer in Compromise application. Submitting an offer while you have unfiled returns will result in automatic rejection. Getting current on all filings is a required first step. A tax professional can help you file any delinquent returns quickly before submitting your offer.
The IRS typically takes six months to two years to review and decide on an Offer in Compromise. The timeline depends on the complexity of your financial situation and the IRS's current workload. If no decision is issued within two years of the IRS receiving your application, the offer is automatically deemed accepted.
The most common reasons for rejection include offering too little relative to your Reasonable Collection Potential, submitting incomplete documentation, having unfiled tax returns, missing estimated tax payments, being in active bankruptcy, and failing to make required payments during the review period. Working with a tax professional significantly reduces the risk of avoidable errors.
You can apply on your own, but the process is complex and a poorly prepared offer is likely to be rejected. A tax professional knows how to calculate your Reasonable Collection Potential accurately, assemble the required documentation, avoid common mistakes, and negotiate with the IRS if needed. Given the acceptance rate hovers around 36%, professional guidance meaningfully improves your odds.
