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An Offer in Compromise - It Could Be Your Answer

May 12, 2008
We have all heard the claims of being able to settle tax debts for "pennies on the dollar". It sounds great, but does it really work? It may seem too good to be true, and the truth is that it is not for everyone. But for those who qualify, it can be a real lifesaver.

An Offer in Compromise, or OIC, is an arrangement with the IRS that allows an individual or business to negotiate a settlement amount that is less than the total amount owed. It is important to realize that the IRS considers this a method of last resort; fewer than 1% of all balance due accounts are resolved this way. The IRS greatly prefers installment payments that will result in the eventual collection of the entire balance that is due. However, the OIC option is out there, and if you meet one of the following conditions, it could work for you.

There are three conditions that a taxpayer can fall under to apply for OIC:

1. Doubt as to liability--you are claiming that the IRS made a mistake, and you do not owe the money they are saying that you do.

2. Doubt as to collectibility--you as the debtor are telling the IRS that you do not have the money or assets available to pay the debt, and you never will. The IRS will calculate your available assets through a formula to determine your settlement amount, such as:
Settlement Amount = 60 months of disposable income + the equity in all of your assets.

3. Effective tax administration--you are claiming "special circumstances" because collection of the debt would create an undue hardship and would be unfair. This option is most often used for elderly or disabled taxpayers.

Recent tax legislation requires that those applying for an OIC submit a $150 application fee, along with a 20% payment of the proposed settlement offer. These fees are non-refundable; even if your offer is rejected, the IRS will keep this money. There are exceptions to the fee requirement. If you qualify for a low-income waiver, or if claiming doubt of liability, you will not have to pay the fees. The IRS has two years to make a decision on your offer.

If your OIC does get accepted by the IRS, it is essential that you remain in compliance with the filing and payment of all taxes for a period of five years or until the amount offered is paid in full, whichever is longer. Failure to do so will cause you to be in default on your OIC agreement.

A large past due tax debt can be an intimidating thing; after all, it's not just some annoying collection agency pestering you, it's the federal government. However, it is important when faced with such a challenge to take a deep breath and examine your options carefully and realistically. If you fit into one of the categories described above, an Offer in Compromise with the IRS could be just the thing to get that burden off of your shoulders.
About the Author
For more information about offers in compromise or other problems with the IRS please visit IRS Problems Resolved.
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