As the federal income tax season approaches, many Americans struggle with the realization that a large tax bill may be due to the Internal Revenue Service, IRS. For these Americans, findings the funds to pay large tax bills can be stressful and virtually impossible. With a process known as Offer of Compromise, taxpayers who face large tax bills may be offered a process, working with the IRS, to resolve tax due at pennies on the dollar. For taxpayers struggling with a large tax bill, understanding the IRS’ Offer in Compromise process, may work to resolve financial and legal ramifications associated with large tax bills and, thereby, relieve stress associated with the federal income tax season.
Offer in Compromise, as described by the Internal Revenue Service, IRS, is a resolution to taxpayer debt through an agreement between the IRS and the taxpayer. As a taxpayer, it is important to understand the IRS will only consider and Offer in Compromise when all other options for repayment of tax due are exhausted. Such options include, but are not limited to, direct payment, installment payments, sale of assets, credit and even loans. When these options are exhausted, it is at that time that the taxpayer may begin the proceedings to file a request for Offer in Compromise (OIC) with the Internal Revenue Service, IRS.
For taxpayers with the ability to pay full federal income tax debt repayment, Offer in Compromise is generally not permitted. However, when an Offer in Compromise request is submitted, the taxpayer is responsible for initiating such request through IRS Form 656, Offer in Compromise. It is through IRS Form 656 that a taxpayer can begin to sort through the various options for repayment of a large tax bill.
Upon completing the checklist associated with IRS Form 656, Offer in Compromise, should the taxpayer determine pursuing OIC is in the best financial interest, the OIC forms should be submitted to the Internal Revenue Service along with payment of, at least, 20 percent of the tax bill due. Should the taxpayer be unable to make a full 20 percent lump sum payment of the tax bill due, one-fifth of the payment may be submitted with the OIC application along with an offer to pay the remaining four-fifths over the next four monthly installments. In other words, even when filing Offer in Compromise applications with the Internal Revenue Service, the IRS will require some form of payment be submitted with the application.
In addition to the 20 percent payment, the taxpayer, when filing IRS Form 656, Offer in Compromise, is also required to submit a $150 application fee which is a non-refundable fee to cover the cost of processing the OIC by the IRS. Of important note is the IRS’ tendency to return IRS Form 656, Offer in Compromise, to the taxpayer due to lack of 20 percent payment arrangements, while retaining the $150 application fee. The key to successful application process for the taxpayer, therefore, lies in the correct calculation of the large tax bill due and ensuring the 20 percent payment is paid in lump sum with the application or, at least, one-fifth of such payment is made initially followed by four additional payments in the following four consecutive months.
While an Offer in Compromise (OIC) may take up to 24 months to process, it is imperative the taxpayer retain proper records and make the full 20 percent payment so as to ensure the IRS Form 656 is not rejected or returned by the Internal Revenue Service, IRS.
For more information regarding the Offer in Compromise tax provisions, visit www.irs.gov.