Can’t Pay Your Tax Bill? The IRS Can Reduce Your Debt With an Offer in Compromise

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An offer in compromise (OIC) is an agreement between the taxpayer and the IRS that settles a tax debt for less than the full amount owed. The program allows you, if you cannot feasibly pay the sum of your accrued tax debt, some degree of relief. The goal of a successful offer in compromise is to create a situation wherein you make reasonable restitution on your tax bill, and the IRS adopts a degree of leniency in return.

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When making an offer in compromise, it is important to make an appropriate offer based on what the IRS is likely to consider your true ability to pay. The IRS states that simply submitting an application does not ensure that the agency will actually accept your offer.

The process begins with an evaluation and verification by the IRS and takes into consideration any special circumstances that may affect your ability to pay. The application will require you to describe your financial situation in detail.

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Before your offer can even be considered, you must:

  • File all tax returns you are legally required to file.
  • Have received a bill for at least one tax debt included within your offer.
  • Make all required estimated tax payments for the current year.
  • Make all required federal tax deposits for the current quarter if you are a business owner with employees.

The IRS will immediately reject your offer if you have not filed all legally required tax returns. If you have not filed all tax returns, the IRS will apply any initial payment you sent with your offer to your tax debt and return both your offer and application fee to you. You cannot appeal this decision.

If you are planning on paying your tax debt in full, you might want to reconsider. The IRS will typically not accept offers of full payment, as this suggests you are able to affordably pay your tax debt in the first place. You will likely be required to pay off your debts in addition to any associated penalties, rather than file an OIC application.

You must select a payment option and include an initial payment with your offer. The amount of the first initial payment, and payments thereafter, will depend on the total amount of your offer and which payment option you choose.

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You can choose between lump sum cash payments, or periodic payments. The lump-sum option requires you to pay 20% of the total offer amount in cash, upfront, and the remaining balance is to be paid in five or fewer installments within five months. The second option, periodic payment, requires you to make the first payment with the offer — the remaining balance is to be paid in monthly installments for a period lasting no less than six months and no more than two years.

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About the Author

Georgina Tzanetos is a former financial advisor who studied post-industrial capitalist structures at New York University. She has eight years of experience with concentrations in asset management, portfolio management, private client banking, and investment research. Georgina has written for Investopedia and WallStreetMojo. 
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