If you find yourself with a tax debt to the IRS that you are unable to pay, one possible solution is the Offer in Compromise. Under this program, the taxpayer submits an application, IRS Form 656, together with detailed financial information to the IRS. The taxpayer offers to settle the outstanding debt for a lesser amount, and chooses between two payment options: 1) a “lump sum” payable in five monthly payments or 2) a payment plan extending from six to 24 months. Generally, the total acceptable offer amount will be lower under the “lump sum” option.
Before applying to this program, you must have filed all previously-due tax returns. In addition, the following preliminary threshold requirements must be met:
- You do not have an open bankruptcy case;
- All required estimated payments have been made;
- If you are self-employed with employees, all required federal tax deposits have been made;
- You have received a bill for at least one IRS tax debt.
Once these requirements have been met, it’s time to gather information. The IRS requires a detailed description of your cash balances, investments, available credit, assets, income and debt. You must also provide your household’s average monthly income and actual expenses. Assembling and organizing this information permits calculation of an acceptable offer to settle the debt.
Your detailed financial information is entered onto an IRS Collection Information Statement, which is then included as part of your application, together with the actual Offer in Compromise form, a $186 application fee and supporting documentation.
As with all other parts of the Offer in Compromise application, the proper inclusion of supporting documentation is critical. Documents required include:
- Most recent paystub from each employer;
- Most recent statement from each investment and retirement account;
- Most recent three months of bank statements for each individual account. If business, most recent six months of bank statements;
- Most recent secured debt statements, such as mortgages, car loans, etc.
- Verification of state and local tax liability, if any;
- Statement of any exceptional circumstances – if payment of the full amount of taxes owed might impair your ability to provide for yourself and your family.
Once the Offer in Compromise package is submitted, there are several key factors to consider:
- You must continue to timely file all required tax returns and pay amounts due;
- You must continue to file and pay estimated taxes and federal tax payments;
- Penalties and interest will continue to accrue during the time the IRS is considering your offer.
If you are interested in learning more about the Offer in Compromise process, call or email Tax Resolutions at (802) 662-4127 or Contact Us for a free consultation.