Many times, citizens find themselves in a financial quandary and have to cut corners on the debts that they will repay. If you are faced with this dilemma and cannot afford to pay the Internal Revenue Service, consider submitting an Offer in Compromise.
“An Offer in Compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s liability. The IRS has the authority to settle or compromise the federal liabilities by accepting less than full payment under certain circumstances,” says William Coleman, a member of the National Association of Black Accountants and president of Coleman and Williams Ltd.
According to Stand Up to the IRS (Nolo Press; $29.99), the IRS will consider an Offer in Compromise for only three reasons:
- Doubt as to liability: the taxpayer does not believe they owe this amount.
- Doubt as to collectibility: the taxpayer cannot afford to pay the amount.
- Effective tax administration: the taxpayer agrees with the amount owed and has the resources to pay but believes it would cause economic hardship or is unfair and inequitable.
The IRS has allowed some taxpayers to settle their debt for as little as 1% of what they owe. This is an official program of the IRS and the agency will fully investigate your ability to pay.
“Offers in Compromise mutually benefit the taxpayer and the IRS. The taxpayer that owes a great deal of money, typically over $10,000, will not have a tax lien on their assets or property, which will affect their credit,” says Fredrick W. Daily, tax attorney and author of Stand Up to the IRS and Tax Savvy for Small Business (Nolo Press; $36.99). “From a government standpoint, they can get the debt off their books without having to take a lot of time and resources to collect the taxes.”
This may sound like the deal of the century, but submitting an Offer in Compromise and essentially playing Let’s Make a Deal with the IRS is a very formal, intensive, and time-consuming process. It is not simple to do. Recent IRS data indicates the current rate of acceptance has dropped dramatically in the past year or two. “The IRS accepts many offers from tax debtors, if they are properly submitted and documentation is provided,” Daily says. “But the majority of offers are rejected because the taxpayer doesn’t bother to learn the rules.”
Since the IRS requires full disclosure, the government has the opportunity to find out every single detail of your family’s finances. You will be required to submit forms 656, 433-A, and 433-B, if applicable. Documentation required includes deeds and mortgages to all real estate, bank statements for up to 12 months, life insurance policies, sources of nonwage income, unpaid bills, evidence of major living expenses, and doctor’s statements.
“You have the right to ask and have the IRS consider your Offer in Compromise. But it is completely discretionary on the part of the IRS as to whether or not they will accept it,” says Daily. “It is a slow process. The more you owe, the longer you