Owing federal taxes does not mean someone failed. In fact, it’s fairly common. In 2018, more than 14 million Americans were in just that situation. But when it’s you standing in that valley, looking at the terrain you’ll have to climb in order to satisfy the IRS, the situation can feel overwhelming.
Fortunately, there are potential solutions to get you back on track. One of these options is known as an Offer in Compromise.
What is an Offer in Compromise?
An Offer in Compromise is one of the tools the IRS offers to help taxpayers settle federal tax debts. It is, as the name implies, a compromise. You pay back a portion of what is owed and the IRS considers the matter settled. This can be done in the form of a lump sum payment, or via smaller, regular installments.
To secure an Offer in Compromise, you must fill out and submit a few different forms explaining your financial situation, along with an application fee and initial payment. The IRS will consider your offer and, if the agency accepts, you can continue on under these new terms. In addition, it will prevent any further actions such as wage garnishment.
However, the IRS does not accept in Offer in Compromise from just anyone.
What the IRS is looking for
The Offer in Compromise tool is not a free pass for those who owe taxes to simply pay less. The IRS will scrutinize your application and review the totality of your situation, including:
- Your ability to pay the owed taxes
- Your income and expenses
- Your assets
Generally, the IRS only accepts an Offer in Compromise if it believes the proposed amount is the most it can expect to get. The agency must be convinced you can not possibly pay the full amount, or that doing so would create financial hardship.
This is not a guarantee. While an Offer in Compromise might be a perfect solution for some, others may need to consider one of the alternative tax resolution strategies. Working with a knowledgeable firm to determine the right path is often the optimal first step.