Using an Offer in Compromise To Settle A Tax Bill

It is sometimes possible to wipe your tax slate clean at an enormous discount. If you qualify for something known as the offer in compromise, referred to as an "offer" or "OIC," the IRS has been known to accept as little as 1% of the amount owed on a tax bill and call it even.

There is no legal right to have a valid tax bill reduced by the IRS -- it is entirely a matter of government discretion. In all but a few instances, however, the IRS must at least give a properly submitted OIC fair consideration. Unfortunately, fewer than half the OICs submitted are accepted by the IRS, although you do have the right to take a rejected OIC to the IRS Appeals Office.

OIC Process Submitting an offer to the IRS is a formal process -- you can't simply call the IRS and say "Let's make a deal." You start by completing IRS Form 656, Offer in Compromise.

There is a $150 application fee for filing an OIC, which you must attach to Form 656. You might be exempt from the fee if your monthly income is below the poverty guidelines. If you claim the poverty guideline exemption, you must submit an Application Fee Worksheet from the Form 656 booklet.

In addition to Form 656, you must submit a Collection Information Statement, or Form 433-A. If you are married and live in a community property state, the IRS may request that your Collection Information Statement include data on your spouse -- even if you alone owe the IRS. Take particular care in filling in this form correctly if you are serious about your OIC. The IRS scrutinizes the disclosures you make in this form much more closely when considering an OIC than when you request to pay your taxes with an installment agreement.

Downside to Submitting an OIC Completing the forms is just the beginning. After you submit the forms, the IRS will ask you for rafts of financial documentation -- pay stubs, bank records, vehicle registrations, and myriad other items. This is an exhaustive, time-consuming process. Some taxpayers wind up submitting boxloads of documents to the IRS to support their OIC request.

There's another drawback to submitting an OIC. If your OIC is rejected, the disclosures you made about your assets give the IRS all the information it needs to accelerate its collection efforts against you. For this reason, it makes sense not to submit an offer unless it is likely to be accepted.

In addition, remember that interest keeps accruing during the offer in compromise negotiation process, meaning you'll end up owing more than ever if you don't eventually make a deal.

If you have IRS back tax debt call offer in compromise attorney Mary King at 941.906.7585