Are you thinking about filing an Offer In Compromise form with the IRS? There are many types of resolutions available for taxpayers but knowing what you qualify for is crucial. A good majority of individuals will qualify for a standard payment plan; however, if there are more extreme financial issues apparent, then a settlement can be obtained to satisfy the tax debt.
An Offer In Compromise is a settlement agreement between a taxpayer and the Internal Revenue Service or state taxing authority. This resolution allows individuals to settle a balance owed for less than the full amount due. If you feel that an Offer In Compromise is the best resolution for your situation, you must first determine if you have a true financial hardship. I have always told clients that the best candidate for a settlement is a taxpayer that has very little or no equity in assets and minimal net monthly income. However, there are many other factors to take into consideration when looking at an offer.
Types of Federal Offers In Compromise
There are three types of offers that the Internal Revenue Service considers: doubt as to collectability, doubt as to liability, and effective tax administration.
Doubt as to Liability – This option is provided to taxpayers that believe they were wrongfully assessed with a tax liability or should not be held liable for the full balance due. The criteria for a doubt as to liability Offer In Compromise is strict and it may be difficult to meet. Ultimately a taxpayer must have a genuine dispute of the amount owed or the overall existence of the balance showing. No financial information or filing fee is required for this type of Offer In Compromise.
Doubt as to Collectability – Consideration is given if there is a financial hardship showing for the taxpayer and there is no means to collect the full amount of liability owed. A taxpayer’s assets and income are taken into account when determining an individual’s qualification for this type of offer. The equity in assets and net monthly disposable income are computed while determining the total reasonable collection potential (RCP) of the individual. This RCP is the basis for the amount being offered to compromise the tax debt. Full financial information must be disclosed and there is a $186 filing fee for each offer. Special taxpayer circumstances may also be taken into account when determining overall collectability. This differs from an Effective Tax Administration offer which is touched upon below.
Effective Tax Administration – An Effective Tax Administration (ETA) Offer In Compromise may be considered when it is shown that the tax is owed and can be collected, but if the taxpayer were to pay it, it would create a financial hardship. The best candidate for this type of offer is an individual on a fixed monthly income and having equity in assets (IRAs, home equity, etc.).
The Internal Revenue Service and state taxing authorities are not against settling accounts, but will conduct a full financial analysis before approving any such settlement. Once it is determined that a taxpayer qualifies for a settlement, it boils down to what type of settlement, the amount that can be paid based on the reasonable collection potential, and the length of time payments will be remitted. Payment terms are determined by the taxpayer and the Offer Examiner assigned to the account. These terms cannot exceed 24 months and the taxpayer must adhere to one of the following:
| Payment Type | Payment Terms |
| Lump-sum Cash | 5 installments or less within 5 months |
| Periodic Payment | Within 6 to 24 months |
The difference between getting an approval or a rejection of an Offer In Compromise is simply this: knowing what the taxing authorities look for and understanding the laws surrounding the offer process. It is crucial that you have representation that has the knowledge and experience with assisting taxpayers with settling their tax debts. When considering filing an Offer In Compromise, it is important to remember that it is a difficult and lengthy process. However, if you qualify, and you have the right representation on your side, an Offer In Compromise can provide you with the best peace of mind possible.
Before filing an Offer In Compromise, do your research regarding the processes involved. You can obtain additional information at here. Call Timberline Tax Group as well to see if you qualify for an Offer In Compromise with the Internal Revenue Service.