An IRS Offer in Compromise: Too Good to Be True?
Basically, an offer in compromise is exactly how it sounds – a compromise between you and the IRS. But don’t get your hopes up just yet. The IRS resolves less than one percent of overdue tax accounts with an offer in compromise. Therefore, an offer in compromise should only be considered after all other payment options have been exhausted. Additionally, you have no legal right to a compromise; it is solely at the discretion of the IRS.
Legitimate Reasons for an Offer in Compromise
An offer in compromise will be considered as an option only under special circumstances. The first is doubt as to whether or not the assessed tax amount is correct. In other words, you were overtaxed. The second is doubt as to your ability to ever pay the full amount owed. The final consideration for an offer in compromise is taxpayer demonstration of hardship.
Disqualifications for an Offer in Compromise
If your offer in compromise is based on any circumstance besides doubt of liability, you can be disqualified if you haven’t filed all necessary tax returns and documents or if you are currently involved in bankruptcy proceedings.
How to File an Offer in Compromise
Unless your offer in compromise is based on doubt of liability, or if you are at or below the poverty level, you will have to pay an application fee of $150. Of course, there is a required form to fill out totaling 40 pages. IRS Form 656 can be accessed and printed at www.irs.gov or by calling 1-800-829-1040. The IRS will suspend all collection activities while it reviews your offer in compromise or while you appeal the rejection of your application.
How Much Should You Offer?
The IRS requires that your offer in compromise repayment be at least the value of the equity of your assets if they were sold today at 80 percent of market value. For example, let’s say your house is valued at $200,000 and your mortgage is $150,000. Since the IRS allows you to use the quick sale value of 80 percent, your house would sell for $160,000. That leaves $10,000 in equity that the IRS could get if they wanted to. Simply put, the IRS will not accept an offer of less than $10,000.
In addition to the equity in your assets, the IRS will also calculate how much money it will take from your future income. Calculating the amount the IRS can take from your future income is a bit complex, but the best explanation I’ve found is at www.nolo.com/lawcenter.
What if you Default on Your Offer in Compromise Agreement?
If you default on your repayment agreement, or if you fail to file and pay taxes at any time in the future, the IRS will reinstate your original tax debt, re-file a Federal Tax Lien, and resume collection efforts. In other words, if you make even one little mistake, you’ll be back in the same position as you were before your offer in compromise.
By Aaron McCullough