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Back Taxes: Is an IRS Offer in Compromise a Good Idea Before Interest Rates Hit 6% in October?

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The IRS’s announcement that it will raise interest rates on underpayment and overpayment of income taxes means millions of Americans will face yet another cost increase in a year of historic inflation. For some, it might make sense work out an “offer in compromise” with the IRS before the higher interest rates kick in later this year.

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An offer in compromise lets you settle your tax debt for less than the full amount you owe. It could be a smart option if you can’t pay your full tax liability or if doing so creates a financial hardship. It might be especially beneficial given the IRS’s Monday announcement that interest rates will increase for the quarter beginning Oct. 1.

For individuals, the interest rate for overpayments and underpayments will rise to 6% per year, compounded daily. That’s up from 5% for the current quarter. If you underpaid and owe more taxes, you’ll pay a higher interest rate on the amount owed beginning Oct. 1.

In this case, you might want to pursue an offer in compromise. According to the IRS website, the agency will consider you for an offer in compromise based on your income, expenses, asset equity and ability to pay your tax debt. Just keep in mind that there’s a $205 non-refundable application fee, so make sure the potential savings exceed the fee.

Make Your Money Work

The IRS typically approves an offer in compromise when the amount you offer represents the most the agency can expect to collect within a reasonable period of time. You can confirm your eligibility and prepare a preliminary proposal using the IRS’s Offer in Compromise Pre-Qualifier Tool.

You’re eligible to apply for an offer in compromise if you:

If you apply for an offer in compromise and the IRS declines, the agency will return your application and application fee, and apply any offer payment you included to your balance due.

You can find forms to submit an application and also access step-by-step instructions by using Form 656-B, Offer in Compromise Booklet.

Your initial payment amount varies based on your offer and the payment option you choose. Here are the payment options:

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If you meet the low-income certification guidelines, you won’t have to send the application fee or the initial payment. You also won’t have to make monthly installments while the IRS reviews your offer.

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