Based on the current economic downturn, many taxpayers find themselves unable to pay their tax bill. That’s why many request an offer in compromise from the IRS. But an offer in compromise is not for everybody. Many people believe that if they currently do not have the funds on hand then the IRS will automatically settle on the tax debt. This is simply not the case.

Prior to submitting your request for an offer in compromise, make sure that you explore all other options first. You may be able to borrow funds from family or friends and or even be able to take out a personal loan.

Taxpayers must file Form 656 if there is uncertainty that the tax liability could be collected in full via a lump sum payment or an installment agreement. Taxpayers should file Form 656-L when they believe that the tax liability claimed by the IRS is incorrect. You are not allowed to file offers simultaneously and claim both that the tax liability is incorrect along with an inability to pay the tax liability due.

One issue that many taxpayers fail to pay close attention to is making sure that all the required information gets properly submitted on a timely basis. If you don’t send the IRS the proper information or if your information is incomplete it will substantially delay the process. It may then take months to get information as to whether the offer in compromise was accepted.

Along with your completed forms you must make sure that you make the required payments. The general rule that you must follow when determining how many offers and the related application fees due is that there is one payment fee and form per entity. Form 656-B contains an application fee and a payment matrix that will help you determine the number of forms that must be filed and how many application fees are required.

If you want any hope of success you must make sure that you stay current with all your tax filings and payment requirements, including estimated taxes and federal tax deposits. Becoming delinquent or filing late could put an end to any chance of success you may have had.

An offer in compromise is not for all taxpayers. Most will not qualify because they have financial resources or the ability to make installment payments. If you believe that you qualify make sure you are diligent in your efforts and provide the necessary paperwork. Then be prepared to wait.

In uncertain financial times, many people struggle to pay for food, housing and other essentials. As people struggle to pay for essentials, they tend to not pay back taxes. But the IRS will not go away. Many people consider an offer in compromise to try to reduce any balance they owe to the IRS. The reality is that it may be difficult for the average person to complete an offer in compromise settlement.

But completing and filing all the required offer in compromise forms can be a daunting task. You may need to seek the help of a qualified professional, including CPAs and tax attorneys. Completing the forms correctly the first time is of great importance.

Taxpayers must file Form 656 or Form 656-L. Be advised that if you have a tax lien on record prior to acceptance of the offer, the lien will not be released until the offer terms have been satisfied or until the tax liability is paid in full, whichever occurs first. A Notice of Federal Tax Lien is often filed during the course of an offer in compromise settlement investigation.

Not only is it critical to file your forms timely, you must make sure that you carefully reply to any IRS correspondence. The IRS may request additional information in order to process your offer.

Taxpayers must submit $150 with the offer in compromise forms. Some taxpayers may be exempt from the fee depending on their income or whether or not the offer is based strictly on doubt as to tax liability. Taxpayers who claim the poverty guideline exception are required to certify that they are eligible by filing Form 656-A, Income Certification for Offer in Compromise Application Fee.

The IRS will maintain a record of all payments made or applied to the total original income tax liability before the offer was submitted. The IRS can also keep any proceeds from levies that were served prior to submission of the offer in compromise settlement, but that were not received at the submission date of the offer.

Remember that if your offer in compromise settlement is accepted, you are required to timely file all income tax returns and make timely tax payments for five full years or until your offered amount is paid in full, whichever time period is longer. If you fail to adhere to these conditions, it can result in default of the offer and the IRS can then collect the amounts originally owed plus any penalties and interest.

The IRS struggles every year to collect unpaid taxes. Interest and penalties accrue on all tax debts until paid and often penalties and interest can equal two or three times the original tax amount. However, the IRS and Congress soon realized that getting something was better than nothing and that it made sense to forgive tax debt if at least some portion of the tax was recovered. This resulted in the Offer in Compromise program.

As the criteria for installment payment plans center on the ability to pay, so does an offer in compromise. The IRS will consider normal household expenditures in the application, but getting qualified is not always easy.

The rejection rate is very high. This often is the case as submitted documentation is often incomplete, the taxpayer is delinquent with tax filings or the taxpayer earns above the required financial allowance. Make sure you review your application in detail and submit the required information.

If the IRS sends you a response, make sure that you respond promptly. You may only have a few weeks to get the final information prepared and submitted back to the IRS. Failing to timely respond is often a reason for rejection.

Upon final review, the IRS assesses the taxpayer’s collection potential. This is where many offers breakdown. The taxpayer may not have the funds currently, but they are generating income and have the ability to pay off the entire balance over time. Under these circumstances, the IRS would prefer an installment agreement rather than an offer in compromise.

The IRS has many programs available to taxpayers who have unpaid tax bills. One of the most popular programs is called the IRS Offer in Compromise. The IRS receives a substantial number of OICs each year, but has only limited processing capabilities in Memphis, TN and Brookhaven, NY (the two locations in charge of processing the offers).

The IRS has made great strides in improving the processing of OICs. These efficiencies are making it easier for taxpayers to navigate the OIC process and enable them to receive responses in a timely manner. When an OIC is submitted, the IRS will verify that it can process the offer. The offer will be processed if the taxpayer has: (1) paid the $150 application fee; (2) filed all back tax returns; (3) is not actively involved in a bankruptcy proceeding; and (4) not been involved in an on-going audit.

During the verification stage of the IRS offer in compromise, the IRS examines all of the financial information that was provided by the taxpayer in the application. Supporting documentation is reviewed and the financial claims (income, property ownership, etc) are analyzed. If the IRS needs additional information they will generate an Offer Verification Letter that will be submitted to the taxpayer. This letter requests the necessary documentation that the IRS needs to further process the return.

The taxpayer has a few weeks to respond with the requested items. If the response is not timely, the IRS can return the offer and dismiss the offer if need be. If the offer is returned, the IRS will not refund the processing fee.

The IRS then assesses the taxpayer’s potential for collection. As a result, the agency has the right to accept the IRS offer in compromise as it was submitted originally. They often may send a letter summarizing the collection potential analysis. The taxpayer has the right to respond to the analysis with any documentation necessary or can dispute the IRS findings. The taxpayer also has the right to accept the IRS’ analysis and agree to increase their offer to the amount that is shown in the analysis letter.

The IRS offer in compromise can be rejected outright after review of the analysis is completed. If the taxpayer does not agree with the analysis, they have the right to file an appeal. At this stage, the taxpayer can submit additional documentation (if needed) and make additional arguments in support of their position.

A tax offer in compromise is merely an agreement between the IRS and a taxpayer whereby the taxpayer’s tax debt is settled for an amount that is less than the full balance that is owed. Generally, the IRS will not accept an offer in compromise if it feels that the tax liability can be paid off in full either in a lump sum payment or through an installment agreement.

Always make sure that a tax offer in compromise is submitted as a last resort. You must review other payment options to determine if there is a chance that you may be able to pay off the debt either by taking out a loan or from other resources you may have.

Taxpayers are required to file Form 656 or Form 656-L when they feel that the tax liability is inaccurate. In most instances, taxpayers must submit Form 433-A or Form 433-B to provide collection Information. Neither of these forms are required when a taxpayer submits an offer solely based on doubt as to the existence of the tax liability.

Once the applicable forms are filed, make sure to respond promptly to any additional requests the IRS may have. Often the IRS will just need clarification on your personal information or financial situation. A timely response will make it easier to get a tax offer in compromise accepted.

Don’t forget to pay your application fee or your offer could be rejected. For married couples who have the same joint tax liability, they can file just one Form 656 and list the joint liability. A fee of $150 must be attached to the form. When a married couple has a joint liability and one of the spouses has an individual tax liability, two offers and two application fees are required.

An important step in the process is making sure that you are current on all your tax filings. It will not look good to the IRS if you are not filing tax returns or making timely tax payments.

A tax offer in compromise is available to all taxpayers, although it may be difficult to qualify. The goal of the IRS is to accept the offer when it is in the best interest of both the taxpayer and the government. In addition, the IRS wants to promote voluntary compliance with all future filings and payment obligations.

Often there are circumstances that arise when a taxpayer has accumulated a substantial tax liability that clearly exceeds any ability to pay in a lump sum. In this situation, the taxpayer should consider hiring an Offer in Compromise attorney to handle the negotiations with the IRS.

The IRS applies the same collection standards utilized in installment agreements to offers in compromises. They will allocate an amount for clothing, food, housing related costs, vehicle transportation, and medical or dental costs. They will also consider any legal cash commitments like student loans, alimony and child support. Ultimately, based on this analysis, the IRS determines whether it is possible to grant relief under an offer in compromise.

Most offers in compromise are denied as the IRS recently stated that over 83% of the offers are rejected. The two main reasons that rejection occurs is because the documentation is inaccurate or incomplete or the taxpayer earns in excess of the required allowance. Your offer in compromise attorney will make sure that your filing is accurate and complete.

Upon submission of the OIC, the IRS must verify that the offer can be processed. The offer goes through a screening process to determine if the taxpayer or taxable entity has: (1) paid the required application fee; (2) ensured that all delinquent tax returns have been filed; (3) not instigated a bankruptcy court proceeding; and (4) not been issued an audit notification.

Hiring an offer in compromise attorney can help you improve the chance that your offer will get accepted. At a minimum they can review your situation and provide you valuable information that will allow you to make an informed decision.

For a taxpayer, an Offer in Compromise represents a great opportunity to resolve tax debt and move forward. For the IRS, accepting an Offer in Compromise represents the same opportunity, but it comes with the expectation that taxpayers will begin to pay their taxes on time. The following are a few helpful tips and words of caution to anyone pursuing an Offer in Compromise.

Firstly, taxpayers should be advised that the IRS has a right to any tax refund still due to the individual for any years up to and including the year in which the Offer is accepted. After that year, the taxpayer regains his/her right to receive tax refunds.

Secondly, it is important to remember that an individual whose Offer was accepted by the IRS must continue to make all payments on time, no matter the type of installment plan. If he/she does not, the IRS may change the Offer in Compromise to default status.

Thirdly, upon accepting an Offer, the IRS demands that the taxpayer remain up-do-date with their tax filings for five years afterward. Form 656 section V stipulates that, after having an Offer accepted, taxpayers must submit all tax returns in a timely manner. Failure to do so jeopardizes the status of the Offer.

In the event of an Offer becoming default, the original Offer In Compromise becomes void; the full amount of the initial tax debt takes effect, complete with interest and penalties, and the duration of the Offer in Compromise is added to the Statute of Limitation on the initial tax liability.

For these reasons, it is important to know all of the rules and regulations that provide the framework for Offers.

Before filing Offers in Compromise, it is important to consider the different payment methods available. Although there are a number of different payment methods for fulfilling an Offer in Compromise, two stand out as the most frequently implemented strategies: the Cash and the Short Term Deferred Offers.

The Lump Sum variety is an Offer of a single payment that covers the full amount of the negotiated liability. The general idea is to take care of the entirety of the debt in one payment. That said, this is often not exactly the case. In addition to the $150 processing fee, 20% of the total Offer is included with the necessary documentation, and the taxpayer may schedule up to five installments to pay off the tax debt.

Short Term Periodic Payment, or Short Term Deferred, Offers in Compromise divide the back taxes into smaller, monthly payments, usually over a two-year period. That means that the total tax debt is divvied up into 24 monthly payments. When sending a Short Term Periodic Payment, the taxpayer must include the first monthly payment in addition to the processing fee, and continue to make the payments, as the Offer schedules them, until the IRS takes action, whether it be acceptance, return, or rejection. Failure to pay will give the IRS the right to return the Offer.

It should be noted that neither of these solutions are better than the other; rather, it depends on the taxpayer’s financial situation. Please make sure to review your circumstances carefully.

Of the three types of payment options for an Offer in Compromise, the Short Term Periodic Payment Offer provides the best compromise in the event that an individual cannot afford to pay the full tax liability in the limited time frame a Cash Offer entails. Rather than 150 days, the taxpayer is expected to deposit monthly payments over the course of two years.

The downside, unfortunately is that the IRS extends the collection potential time frame, as well, from 48 months to 60 months, increasing the value calculated for monthly surplus income from four years to five. To compare then, if an individual is deemed to have $50 of additional income each month, then taking the Short Term Periodic Payment route would increase the least collectible income by $1,100. But again, the taxpayer is benefitted by the additional time in which they must pay the full tax liability. For this reason, individuals with low net incomes are advised to consider this type of payment, since the lower the net income, the lower the additional cost.

Another contrast to the Cash Offer in Compromise is the initial payment that is to be included with the processing fee, which is the first Offer payment, rather than 20% of the total offer. The IRS expects monthly payments to continue, as set out in the Offer, while the IRS takes the Offer into consideration, and these count as the first payments of the 24 installments, should the Offer be accepted. In the event of a rejection, the payments count against the individual’s longest standing tax debt, but cannot be refunded.

In most circumstances, the Deferred Periodic Payment Offer in Compromise is the most expensive and, therefore, worst option for a taxpayer. Net monthly income is calculated as far as the Statute of Limitations on the most recently accrued tax liability extends, which can mean calculating up to ten years of collection potential (this time period may be extended by certain circumstances, such as by the individual filing for bankruptcy). It should also be noted that if the total liability will be paid off before the Statute of Limitations expires, then the payments would cease at that point.

To contrast to the other types of payment options, let us say that a taxpayer has $50 net monthly income. For a Cash offer, that figure would be multiplied over a period of 48 months, coming to $2,400 of collection potential. For a Short Term Periodic Payment Offer in Compromise, it would be multiplied across 60 months, totaling $3,000. But, if the tax liability would not be paid off before the expiration of the statute of limitations, the $50 per month would be multiplied, in many cases, over the subsequent nine years, totaling $5,400.

Individuals considering the Deferred Periodic Payment option would be advised to also consider an installation agreement. That said, all financial situations are different, and the taxpayer is advised to either research his/her options thoroughly before deciding on a course of action. For example, if tax debt were accrued years previous to the Offer, and the Statute of Limitations had not been extended, it could conceivably benefit the taxpayer to opt for this payment method.