Posted on | November 23, 2011 | Comments Off on Tax debt reduction: Offers in Compromise explained
There are many different types of debts that people are struggling with these days and for some people it is their tax debt that is causing them a huge problem. Whilst the Internet Revenue Service does, of course, expect people to pay the taxes that they owe, but in some cases an exception may be made and the tax debt may be reduced through the use of an Offer in Compromise.
If the IRS has reason to believe that there is little to no chance of being able to receive the total amount of the tax debt that you owe, or maybe there is dispute over whether someone is definitely liable for any tax debt that they are in, the IRS may – at its discretion – accept the submission of an Offer in Compromise. This is where you basically make an offer to the IRS, which would see you paying less than the amount that you owe.
The reason why the IRS is sometimes willing to accept an Offer in Compromise is because it means that it will at least be able to recoup some of the debt owed whereas without the Offer in Compromise the IRS risks losing out on the whole tax debt.
If you do enter into an Offer in Compromise with the IRS you have to make sure that you adhere to the terms and conditions of the contract, which you will have to agree to as part of the submission process. Form 656, or the Offer in Compromise, needs to be completed in addition to Form 433-A, which is the Collection Information Statement. Form 433-A Worksheet is also used when calculating the amount that you offer to pay to the IRS as part of the Offer in Compromise.
As part of any Offer in Compromise you will be agreeing to a number of things, which includes:
- You will pay the sum of money that has been offered as part of the Offer in Compromise
- For the next five years you will make sure that you both file your tax returns regularly and on time and that you pay your tax bills on time
- Any refunds or credits relevant to your taxation debts prior to submission of the Offer in Compromise can be kept by the IRS
- During the year for which your Offer in Compromise is approved the IRS will be able to hold on to any potential taxation refunds that might have been paid to you
- The IRS has the power to revoke any Offer in Compromise and demand the total amount of the debt if you fail to adhere to the contractual rules
Andrew writes frequently about personal finance as well as issues effecting both consumers and small businesses, covering everything from credit cards to mortgages to how to setup an umbrella company.
- Tax Advice for Newly Weds (2008taxes.org)
- How long should you keep your tax documents? (2010taxes.org)