Sometimes, taxpayers find themselves with a tax bill they just can’t satisfy. The taxpayer is willing to pay, but the bottom line is more than they can afford. Circumstances like this are made for compromise; or more precisely, an offer in compromise.
Meeting in the middle …
“An offer in compromise is an agreement between a taxpayer and the IRS that settles a tax debt for less than the full amount owed," the IRS explains. "An offer in compromise is an option when a taxpayer can't pay their full tax liability. It is also an option when paying the entire tax bill would cause the taxpayer a financial hardship."
As you might expect, all offer-in-compromise requests are closely scrutinized. So, the IRS created the free Offer in Compromise Booklet to provide easily accessible information about eligibility, associated fees, and how arrangements affect other tax-related items, like refunds.
How do taxpayers get the offer in compromise process started?
Generally, taxpayers, whether individuals or business owners, must first make an appropriate offer based on what the IRS considers their true ability to pay. Acceptance is not automatic; unrealistic offers can be rejected by the IRS.
Before an offer can be considered, the taxpayer must:
- File all tax returns they are legally required to file,
- Have received a bill for at least one tax debt included on their offer,
- Make all required estimated tax payments for the current year, and
- Make all required federal tax deposits for the current quarter if they are a business owner with employees.
Also remember that the IRS generally won’t accept an offer in compromise from anyone who actually has the ability to pay the tax debt in full, either through an installment agreement or equity in assets.
When it reviews applications, the IRS considers the taxpayer’s unique situation and any special circumstances that may affect their ability to pay in addition to their income, expenses and asset equity.
Currently, the application fee for an offer in compromise is $205, but the IRS says it can be waived if an applicant "[meets] the definition of a low-income taxpayer."
The IRS’ Offer in Compromise Pre-Qualifier Tool can help a taxpayer determine if they are eligible to make an offer to settle their tax debt. The taxpayer is taken through a series of questions that clarify their individual tax situation.