Did you know that 80% of Americans use a budget to keep their finances on track? Even if you’re diligent about managing your money, it’s still possible to hit roadblocks that can result in serious debts. And if it’s tax season, you may find yourself treading water due to financial problems. Fortunately, an offer in compromise can help with tax debt challenges.
Read on to learn what this IRS program is all about!
Know What an Offer in Compromise Does
Think of an offer in compromise (OIC) as a form of tax debt relief. While this program will not completely clear you from tax debts, it will reduce your burden.
That’s because you’ll be able to come to a compromise to pay an amount that is lower than your debt balance. Essentially, you’ll propose a realistic payment target through an application process. Then the IRS will determine whether to agree to it or not.
There are some requirements you’ll need to meet first. And it’s important to know that an OIC is distinct from a typical repayment plan a taxpayer might arrange with the IRS. You’ll need to demonstrate a significant need and an inability to budget for making normal tax payments.
Research the Eligibility Requirements
Not everyone is eligible for an OIC, so it’s wise to consider several factors before filing an application. Your application has the best bet of moving forward if you’re in good standing with the IRS. For example, you cannot be in the midst of a bankruptcy situation while you are applying for an OIC.
Have you missed filing previous tax returns from the past year or two? If you have this kind of blemish on your record, your OIC application could be turned down.
Likewise, if you have estimated tax payments to make during the year, you need to have submitted those in order to be eligible for an OIC. A record of effort can help strengthen your application.
Your application may be denied if it is incomplete, as well. Make sure to review it before submitting it to ensure that all required information is present. This also means you should check to see that you’ve included the application fee.
Understand the Application Process
The OIC application process involves filling out forms, plus submitting an initial tax payment and application fee. As for the forms, you’ll need to fill out a 656 form. This form serves as an official OIC document showing that you’re intending to enter into an agreement with the IRS.
Meanwhile, you’ll need to submit a 433-A form, as well. This form details your financial situation for the IRS. It also aims to demonstrate how you can approach paying taxes given your debt.
To validate your financial situation, you may need to provide evidence of your income, savings, and other debts. Further, you may need to show what your normal spending habits look like. Putting together evidence can translate to showing examples of monthly grocery or car payments, for instance.
In addition, plan on spending $205 to file the OIC application. And be prepared to make an initial payment toward your debts right away if your application is approved, or even if it isn’t.
Check the Payment Options
Your options for paying IRS debts through an OIC include two primary methods of payment. One is a lump sum payment, and the other is a payment plan.
With the lump sum payment, you’ll have five months to make the designated payment amount. In addition, you’ll need to pay 20% of that total when you submit your application. Even if your application is not accepted, your 20% payment will remain with the IRS.
For those unable to make a significant payment in a short period of time, the payment plan option may be better. You’ll still need to submit your first payment with your application, and you’ll need to make at least six payments in total. And, as with the lump sum payment, the initial payment will go through, even if your application is denied.
In a payment plan, you’ll have 24 months to make the proposed payment amounts. It can be helpful to have some assistance trying to negotiate your payment terms, especially if you are not a tax professional. Click for more to learn more about ways to get help.
Be Aware of the Potential Outcomes
The IRS will review your application for completeness and use a formula to determine how much you can reasonably pay. They are looking to see whether there’s a solid chance you’d be able to pay your full tax debt amount. If it looks unlikely, your OIC application may stand a better chance of being accepted.
If you’ve dealt with a collector trying to get payments from you, that will stop when you submit an OIC application. And if your OIC application is not accepted, you can appeal that decision within one month.
Be aware, however, that getting an OIC accepted is not always easy. You’ll need to prove that your income is low and that you lack significant assets. If you don’t meet these criteria, you may need to look into other tax debt solutions.
Look into an Offer in Compromise
An offer in compromise can be a critical form of tax debt relief when you’re drowning in debt. Check the eligibility requirements and proofread your application to make sure it is complete. Understand the payment options, too, and get assistance putting together the best offer.
Need more tax tips? Check back soon for new and informative articles.