What if you could pay just a portion of your overall tax debt? Depending on how much you owe, how much you earn, and your ability to repay, that could be a reality for you.
In addition to payment plans that allow you to pay off all of your debt in small increments, the IRS also offers solutions that reduce the amount of tax debt you’ll pay overall. Through the IRS Offer in Compromise (OIC) program, you can pitch a plan to pay a certain amount of your tax debt over a certain period of time. Then, you can ask that the remaining balance be forgiven once you’ve paid the amount you proposed.
This tax debt compromise program is not available to everyone, but it can be a game-changer if paying all of your tax debt (even on a payment plan) would seriously jeopardize your financial health and that of your family.
Here are some factors that the IRS uses to determine if someone is qualified to begin IRS Offer in Compromise payments:
- Household income
- Total expenses, including other debt, housing costs and living costs (doesn’t include charitable giving or college tuition)
- Total assets, such as case, available credit and investments
- Your ability to pay
Before you submit your OIC application, you must file all federal income tax returns and not be involved in any bankruptcy filings, as both factors could disqualify you. When you’re ready to apply, consider which of the following two proposal options are most feasible for your financial situation:
- The lump sum option allows you to pay 20% of your proposed compromise amount upfront.
- The payment plan option allows you to make recurring payments of a set amount over a proposed amount of time, reaching your proposed compromise amount.
The IRS typically approves OIC applications if the debt payment amount proposed meets their standards of what they can expect to collect in a given amount of time. You can work with a tax lawyer or other relevant professional who provides Offer in Compromise assistance to calculate an offer, fill out the application, and file your proposal.
Every applicant must fill out the Form 656 Offer in Compromise application. Then, you’ll also submit Form 433-A (if you work for an employer or yourself) or 433-B (if you own a small business).
When you submit an IRS Offer in Compromise application, you have to pay a $205 application fee. However, if you meet the standards of a low-income taxpayer, you may have this fee waived.