If you have an outstanding tax debt that you can’t afford to pay, you may be able to negotiate a settlement with the IRS. Like other settlement industries for other types of debt, the tax debt settlement industry have had companies who ran scams on consumers. So, before you consult a professional to help with your tax debt settlement, here’s what you should know.
Offer in Compromise Details
The IRS term for a tax debt settlement agreement is called an Offer in Compromise or OIC. There are only a few circumstances that the IRS will accept a settlement offer from a consumer. First, the IRS almost always has to believe that you can’t pay the tax debt in full either in a lump sum or through an installment period during the collection period. This often means that your monthly income exceeds your living expenses, that you don’t have any assets or property that could be used to pay the tax debt, and that the amount of your tax debt and living expenses outweighs the value of your assets and monthly income. You’ll have to go with the IRS guidelines on reasonable living expenses, liabilities, and valuable assets.
Forms and Costs Associated With Tax Debt Settlement
It generally costs $150 to apply for an Offer in Compromise and you must file IRS Form 656 to apply. There are there options for paying the settlement if the IRS accepts your application. You’ll most likely have to also fill out Form 433-A, a Collection Information Statement which includes details about your income, assets, and liabilities.
You can make a lump-sum payment in five or fewer installments. When you make your Offer in Compromise to the IRS, you’ll have to submit one of these five payments in addition to the application fee. You’ll also probably have to keep making payments while the IRS reviews your application and makes a decision about accepting your offer. Installment payments are not refundable. If the IRS rejects your offer, the payments you’ve made will be applied to the tax you owe and you’ll still be responsible for the rest of the balance.
What You Must Do to Keep Your Settlement Contract
If the IRS accepts your offer, there are some strings attached. First, you have to pay the amount that’s listed in the Offer of Compromise. Second, generally all your tax returns must be filed and paid on time for the next five years. Next, generally the IRS will be allowed to keep any refunds that are due to you in the year your offer is approved. For example, if you submit an offer in 2011 and you have a tax refund due from your 2010 tax return, the IRS would keep this tax return.
The Office in Compromise is a contract between you and the IRS. If you don’t keep up your end of the bargain, the IRS will likely revoke the Offer and the total tax will be due. This means you should be sure to file your taxes by April 15 for the next five years or file for an extension if you can’t make that date. If you have tax liability, you probably need to pay it on time to prevent the IRS from revoking your Offer.
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