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How Does an Offer in Compromise Work?

Are you almost at the end of your rope trying to settle your unpaid taxes? If you haven't been able to swing a payment plan, tax abatement, or other tax debt relief plan, then you may need to consider an offer in compromise. Generally, the Internal Revenue Service (IRS) will allow this measure only as a last resort to people who've run out of other options.

How Does It Work?

Under this plan the IRS will agree to reduce the amount of tax debt you owe if it's in the government's best interest. In rare cases the IRS will agree to such a settlement if there is any doubt about whether or not the tax is correct or if there is reason to believe that the taxpayer will never be able to pay the full amount. In some cases, an offer in compromise is allowed if it's determined that paying the full amount will create extreme financial hardship or would be unfair in some way. It's tough to qualify for this type of tax debt relief, and less than 1% of all balance due accounts are resolved this way, according to the IRS.

Filing the Application

As with any complex tax matter, it's best to seek the help of a professional when attempting to make an offer in compromise. If you propose to pay a lump sum you'll need to pay 20% of the amount when the application is filed. If you propose an installment plan you'll need to send the first payment with the application. Even if your offer is rejected that money will not be refunded since it's considered to be a payment on the tax you owe.

However, if you are making a partial payment with your application you can designate how the money should be used, such as if you want it to go toward a specific tax period. People who are determined to be low income or unable to pay all of their tax debt don't have to pay the application fee, 20% down payment, or initial installment.

File Delinquent Returns

In order for an offer in compromise to be accepted you must file all delinquent tax returns. The IRS will give you 30 days to file these returns and make any required estimated tax payment. If you don't comply, the offer will be returned but any money you've paid will be applied to your unpaid taxes.

Should your offer in compromise be accepted by the government, you'll need to file all required tax returns and pay all taxes due for the next five years or until the amount is completely paid off, whichever is longer. Tax liens won't be released until the amount of the settlement is paid.

Not many people qualify for an offer in compromise. But if you think this will work for your situation make sure you file your application correctly and respond promptly to any additional requests from the IRS.

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