An IRS Offer in Compromise may allow eligible taxpayers to settle federal tax debt for less than the full amount owed. The IRS bases its decision largely on the taxpayer’s income, expenses, assets, and ability to pay, so not every taxpayer with significant tax debt will qualify.
The IRS looks closely at your income, expenses, assets, and ability to pay. You also need to meet specific eligibility requirements and submit detailed financial information. A mistake or unrealistic offer can lead to a rejection and leave you facing the same tax debt.
Gabaie & Associates, LLC helps individuals and businesses in Frederick address IRS tax debt and determine whether an Offer in Compromise is a realistic option.
Have IRS tax debt you cannot afford to pay? Call (410) 358-1500 or fill out an online form to discuss your options.
What Is an IRS Offer in Compromise?
An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that allows the taxpayer to settle a tax debt for less than the full amount owed. The IRS generally considers an offer when there is doubt about whether the full tax liability can be collected or when paying the full amount would create an exceptional hardship.
An OIC is not available simply because a tax bill is large or difficult to pay. The IRS considers whether you have the ability to pay the debt based on your financial circumstances.
For many taxpayers, the key question is whether the IRS believes it can collect more through an approved offer than it could reasonably expect to collect through other means.
Do You Qualify for an Offer in Compromise in Frederick?
Before submitting an offer, it is important to determine whether you meet the IRS requirements. In general, the IRS expects taxpayers to be current with required tax filings and payments before an offer can be considered.
The IRS may also evaluate:
- Your income and household expenses
- Cash and bank accounts
- Real estate and other property
- Vehicles and other valuable assets
- Investments and retirement accounts
- Business interests and business income
- Your existing tax liabilities
- Your future ability to pay
The IRS uses this information to calculate your reasonable collection potential, or the amount it believes can reasonably be collected from you.
That calculation can be more complicated than simply adding up your assets and subtracting your debts. The IRS applies its own rules when determining which assets, expenses, and future income should be considered.
How Much Should You Offer the IRS?
There is no standard Offer in Compromise amount that applies to every taxpayer. The appropriate offer depends on your financial situation and the type of OIC you are pursuing.
For example, an offer based on doubt as to collectibility generally requires the IRS to determine that you do not have enough income or assets to pay the entire tax debt within the applicable collection period.
The IRS may also consider an offer based on effective tax administration in limited circumstances. In these cases, the taxpayer may have the ability to pay the full liability, but paying it would create an economic hardship or would be unfair and inequitable.
This is why submitting an arbitrary number can be risky. An offer that does not reflect the IRS’s calculation of your ability to pay is unlikely to solve the problem.
What Happens After You Submit an Offer?
Once an Offer in Compromise is submitted, the IRS reviews the financial information supporting it. The agency may request additional documentation or clarification before making a decision.
While the offer is pending, certain collection activity may be affected, but an OIC does not automatically make every IRS collection problem disappear. Interest and penalties can also continue under applicable rules.
If the IRS accepts the offer, you must follow the terms of the agreement. This includes making the required payments and staying current with your federal tax filing and payment obligations.
Failing to meet the terms can put the agreement at risk and potentially leave you responsible for the original tax liability.
Should You Apply for an Offer in Compromise?
An OIC can be a useful tax resolution tool, but it is not the right solution for everyone. Depending on your income, assets, and the amount you owe, an installment agreement or another resolution strategy may make more sense.
Before sending anything to the IRS, it is worth taking a close look at your financial situation and the collection options available to you. Our tax attorneys can help you understand whether an OIC is realistic and what information the IRS is likely to consider.
The Offer in Compromise Process for Frederick, MD
Applying for an Offer in Compromise involves more than completing an IRS form and choosing an amount you would like to pay. The application requires financial information that allows the IRS to evaluate your ability to pay.
For Frederick taxpayers, the process is handled through the IRS, but your local income, housing costs, property, and other financial circumstances may affect the information included in your application.
Depending on your circumstances, you may need to provide information about your household income, monthly expenses, bank accounts, investments, real estate, vehicles, and other assets. Business owners may also need to provide detailed information about their business finances.
The IRS reviews this information to determine how much it believes you can afford to pay. That makes accuracy important. Leaving out an asset, understating your income, or claiming expenses the IRS will not allow can affect the outcome of your application.
Your proposed payment terms also matter. An accepted offer may be paid as a lump sum or through periodic payments, depending on the arrangement approved by the IRS.
What If the IRS Rejects Your Offer?
Receiving an OIC rejection can be frustrating, particularly after gathering financial records and submitting a detailed application. But the next step depends on why the IRS rejected the offer.
The IRS generally provides taxpayers with information about its decision. Reviewing that information can help determine whether the IRS’s calculation is correct or whether additional facts should be considered.
You may have the right to appeal a rejected Offer in Compromise. An appeal gives you an opportunity to challenge the IRS’s decision and provide additional information when appropriate.
If the offer was rejected because the IRS determined you could pay more than you offered, for example, it may be necessary to examine the agency’s calculation of your assets, income, or allowable expenses.
Acting quickly matters because appeals have deadlines. Waiting too long can limit your options.
Alternatives to an Offer in Compromise
An Offer in Compromise is only one way to address federal tax debt. If you do not qualify or the IRS is unlikely to accept your offer, another solution may be available.
Depending on your financial situation, alternatives may include an installment plan agreement, which allows you to pay the tax debt over time. Some taxpayers may also qualify for a status in which the IRS temporarily delays collection because paying would create a financial hardship.
In other situations, a taxpayer may have grounds to dispute the amount the IRS says is owed or request a different form of tax relief.
The best option depends on the facts of your case. Choosing an OIC simply because it promises a reduced tax balance can waste time and money if your financial circumstances do not support an acceptable offer.
Frequently Asked Questions
How long does an IRS Offer in Compromise take?
This isn’t really addressed in the body and is a common practical question. It gives you an opportunity to explain that the process can take months and that timing varies based on the complexity of the taxpayer’s finances and whether the IRS requests additional information.
Can I apply for an Offer in Compromise if I owe payroll taxes?
This adds a business-owner angle that the body only briefly touches. It also creates an opportunity to distinguish between individual and business tax debt and explain that responsible-person trust fund recovery issues can have different rules.
What happens to my tax debt if the IRS accepts my Offer in Compromise?
The current page says taxpayers must follow the agreement but doesn’t really explain the five-year compliance requirement after acceptance. That’s genuinely new information and useful to someone considering an OIC.
Talk to a Frederick, MD IRS Tax Attorney
An IRS tax balance does not necessarily have to be paid all at once, and in some cases, you may be able to settle for less than the full amount. But an Offer in Compromise is not a shortcut. The IRS expects detailed financial information and will evaluate whether the proposed settlement makes sense based on your ability to pay.
If you are considering an Offer in Compromise, getting advice before submitting an application can help you understand your options and avoid an offer that is unlikely to succeed.
Gabaie & Associates, LLC helps taxpayers address IRS tax debt and pursue appropriate tax resolution strategies. Call (410) 358-1500 or contact the firm online to discuss your situation.
