Understanding Offers in Compromise: Can You Settle Your IRS Debt for Less?
Many individuals feel overwhelmed when tax bills start piling up, believing there’s no way to regain control. However, some solutions can help you reduce what you owe and get back on track. One highly effective option is an Offer in Compromise (OIC)—a program specifically designed to help taxpayers settle their IRS debt for less than the full amount owed. This powerful tool provides a path to financial relief and a fresh start.
At Hoke Law Firm, we often see individuals feeling trapped under the weight of IRS Debt, and we're here to help. Our firm serves Baton Rouge, Louisiana, as well as the neighboring areas of New Orleans and Lafayette. If you’re struggling with taxes, reach out to us so we can review your situation and discuss solutions tailored to your needs.
What Is an Offer in Compromise?
An Offer in Compromise is an IRS program that enables taxpayers to settle their tax debt for less than the full amount owed. While it may not be suitable for everyone, it can be a critical lifeline for those facing financial difficulties. The IRS approves offers only when it determines that the proposed amount is the maximum it can reasonably expect to collect.
There are three main reasons the IRS may accept an Offer in Compromise:
Doubt as to collectibility: When it’s unlikely that the IRS can collect the full amount owed.
Doubt as to liability: If there’s a genuine dispute over whether the tax debt is correct.
Effective tax administration: When paying the full amount would create an economic hardship or be unfair due to special circumstances.
Each of the above situations requires detailed documentation and a realistic proposal to the IRS.
How the IRS Determines Your Offer
The IRS evaluates offers based on your ability to pay, income, expenses, and the equity in your assets. This means they’ll look closely at your financial situation to determine whether your offer is reasonable.
Some factors they consider include:
Income: All sources of income are reviewed, including wages, investments, and self-employment earnings.
Expenses: The IRS compares your monthly living expenses to national and local standards to see what you can afford to pay.
Assets: Equity in property such as your home, car, or savings accounts may be factored into your offer.
Your financial information must be accurate and complete. Misreporting income or assets can result in the outright rejection of your offer or future penalties.
Eligibility Requirements for an Offer in Compromise
Before submitting an offer, we must make sure you meet the IRS requirements. These include filing compliance, which means all required tax returns must be filed. You must also be current on all required estimated tax payments. Finally, you need to be up to date with any existing installment agreements or have special arrangements in place.
If any of these requirements aren't met, the IRS will generally reject your Offer in Compromise, even if your financial situation suggests you could pay less.
The Offer Process Step by Step
Submitting an Offer in Compromise involves multiple steps, and the IRS expects careful documentation. These steps include:
Complete the necessary forms: The main form is Form 656, Offer in Compromise, accompanied by Form 433-A (for individuals) or 433-B (for businesses), which detail your financial situation.
Calculate your offer amount: The IRS generally expects an amount equal to your “reasonable collection potential,” which is based on your income, assets, and allowable expenses.
Submit your application and payment: A $205 application fee is required, unless you qualify for low-income status, in which case a portion of the offer amount may be included with your application.
Respond to IRS requests: The IRS may ask for additional documentation, clarification, or updated financial information.
Receive a decision: The IRS will approve, reject, or make a counteroffer. If your offer is rejected, you can appeal within 30 days using Form 13711.
Working through the Offer in Compromise process can be complicated, but with careful attention to detail and a clear understanding of the IRS's requirements, it's a viable option for resolving overwhelming tax debt. By preparing thoroughly and responding promptly to IRS requests, you increase your chances of a successful outcome and a fresh start on your financial journey.
Improving Your Chances of Acceptance
Although there’s no guaranteed method for having an Offer in Compromise accepted, there are steps we can take to strengthen your case.
Start by providing thorough and accurate documentation. Submit complete financial records, including detailed information about your income, expenses, and assets. Be realistic with your figures—avoid underreporting income or inflating expenses, as the IRS is adept at identifying discrepancies.
It's also important to consider future income, as the IRS may reject an offer if it believes you’ll be able to pay the full amount later. Finally, stay compliant by filing any outstanding returns and keeping up with future tax obligations to demonstrate good faith. These strategies can help present a compelling case that the IRS will view favorably.
Common Mistakes to Avoid
Many taxpayers make mistakes that result in their offers being rejected. Common pitfalls include:
Incomplete or inaccurate forms: Missing forms or incorrect calculations can delay or prevent the acceptance of your application.
Ignoring collection alternatives: Some may overlook other solutions, such as installment agreements, which could be more appropriate.
Failing to document special circumstances: If your financial hardship or unusual situation isn’t clearly explained, the IRS may not approve your offer.
Submitting an unrealistic offer: Offering too little can lead to outright rejection, while offering too much could unnecessarily reduce your savings.
By avoiding these mistakes, we can improve the chances that an Offer in Compromise will be successful.
Alternatives to an Offer in Compromise
If an Offer in Compromise isn’t viable, other options may help you manage IRS Debt:
Installment agreements: These allow taxpayers to pay their debt in monthly installments over a specified period.
Currently not collectible status: If your financial situation is dire, the IRS may temporarily delay collection efforts.
Penalty abatement: In some cases, the IRS may reduce or remove penalties, which can lower your total debt.
Partial payment installment agreements: These combine elements of installment plans and compromise to settle IRS Debt for less over time.
Each option has its pros and cons, so it’s essential to evaluate which approach aligns with your financial reality.
Maintaining Compliance After an Offer
Once an Offer in Compromise is accepted, it’s essential to maintain compliance. If the offer requires payments over time, make sure they’re made on schedule.
Continuing to file all future returns on time shows good faith and prevents default. Additionally, accumulating new IRS debt can jeopardize the accepted offer. Following these steps helps protect the settlement and maintain your financial stability.
The Long-Term Impact
While an Offer in Compromise can relieve immediate financial pressure, it’s important to consider long-term implications:
Credit impact: The IRS reports settled debt to credit agencies, which can affect your credit score.
Tax liability resolution: Once accepted, the offer fully satisfies the debt, providing a sense of closure.
Financial planning: This is an opportunity to reassess budgeting, savings, and tax withholding to prevent future IRS Debt.
We work with clients to make sure that they understand the benefits and responsibilities associated with settling IRS Debt.
Contact Us Today
If you’re facing IRS Debt and want to explore the possibility of an Offer in Compromise, don’t wait. At the Hoke Law Firm, we serve clients in Baton Rouge, Louisiana, as well as the neighboring areas of New Orleans and Lafayette. Our attorneys can help you understand your options and move toward financial relief. Call our office to discuss your situation.