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Offers in compromise and tax debt

There are certain instances where you can settle a tax debt for less than what you owe through an offer in compromise. However, this is not a simple matter.

The IRS has a particular procedure they follow when it comes to offers in compromise, and they also have tremendous discretion on whether to approve such an offer. Generally, the IRS will only accept an offer to compromise if you met certain criteria.

This criterion for an offer in compromise includes:

  • You have filed all necessary tax returns
  • The IRS already sent you one bill concerning your tax debt
  • You have completed making your estimated tax payments for the year (including payroll deposits if you are a business owner)

When making an offer to compromise, the IRS requires you provide an acceptable grounds for proposing the offer to begin with. The IRS is more likely to accept an offer to compromise if collection of the full tax debt proves to be challenging.

You may also be able to convince the IRS to accept the offer in compromise if you can demonstrate paying the tax bill in full will result in economic hardship for you. And there are rare circumstances where the IRS will accept such an offer if you are able to demonstrate that you should not have to pay the owed taxes.

It is important to note that an offer in compromise involves filling out a substantial amount of paperwork. Paperwork includes Form 656 where you will state your official grounds for requesting an offer to compromise, and whether you wish to make payments on installments or in lump sum.

Other paperwork includes Form 433-A and Form 433-B (when making an offer to compromise concerning business taxes). While there is a formula that accompanies Form 433 regarding how much you may wish to offer, this formula amount may be higher than you wish to pay. In that case, you may have to plead to the IRS for a lower offer amount due to your special circumstances.

Since the IRS hardly ever makes things easy for taxpayers, working with an attorney who understands how the IRS operates may be necessary.

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