IRS Offers In Compromise

The Internal Revenue Service (“IRS”) has a little known program which provides for the settlement of tax debts for less than the full amount owed.  Eligible taxpayers with significant tax debt that they cannot pay can make what is known as an “Offer in Compromise” to settle their tax obligations at a discount.  The goal of this program is to match the taxpayer’s ability to pay with the IRS goal of recovering the maximum tax revenue.

An Offer in Compromise is a formal submission to the IRS proposing to settle an existing tax debt on agreed terms.  Generally two types of settlements are possible.  The first is a “lump sum” payment of a portion of the total tax debt.  The second option is a periodic payment plan, generally to be paid over 24 months.

In order to be eligible to submit an Offer in Compromise the taxpayer (1) must have filed all tax returns required to be filed through the most recent tax year; (2) must make all required estimated tax payments for the current year; and (3) for business taxpayers, must make all required federal tax deposits for the current quarter.  In addition, taxpayers must not be involved in an open bankruptcy proceeding.

At the time an Offer in Compromise is submitted, the taxpayer is required, in the case of a lump sum settlement proposal, to include 20% of the settlement amount with the offer, with the balance required to be paid within 5 months of the date the offer is accepted.  In the case of a periodic payment plan, the first payment must be submitted with the offer with the balance to be paid within 24 months in accordance with the terms of the offer. 

It is important to note that if the IRS does not accept the Offer in Compromise, it still keeps the payments made at the time the offer was submitted.  Generally the IRS has up to 2 years to render a decision on an Offer in Compromise.  During this time it evaluates the financial information submitted by the taxpayer along with the offer, which includes information on the taxpayer’s income, expenses, assets and liabilities.  The financial information submitted by the taxpayer must support the conclusion that the taxpayer is unable to pay the existing tax debt in full.

The Offer in Compromise can be a valuable option for taxpayers who can demonstrate they are unable to pay their existing tax debts but can assemble sufficient funds to pay a portion of those debts in exchange for the forgiveness of the balance. 

– Kevin Palmer


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