Learn about these 3 legal programs under the Offer In Compromise to take your mind off your tax trouble worries.
In this article:
Tax Trouble: 3 Legal Programs To Alleviate Your Worries
What Is an Offer In Compromise?
An Offer In Compromise is an agreement between a taxpayer and the Internal Revenue Service (IRS) that allows the taxpayer to settle tax debts for a lesser amount. Through this, the federal government aims to help taxpayers achieve economic development and fewer tax troubles by providing such assistance and opportunities.
To be eligible, you need to make an offer based on the IRS’ assessment of your ability to pay. Other considerations, such as personal data and tax compliance documents, will also be assessed.
Under the Offer In Compromise, there are three legal programs for alleviating tax troubles. Listed below are the eligibility and protocol per program.
What Are the 3 Legal Programs Under Offer In Compromise?
1. Offer In Compromise Doubt As To Liability
If you believe that the taxes you are required to pay are incorrect, you can file for this option. An Offer In Compromise Doubt As To Liability enables you to contest IRS tax troubles which may arise from audit mistakes.
To file for this, you need to fill out Form 656L (Offer in Compromise Doubt as to Liability). Mail the prepared form via Certified Mail, along with your supporting documents. The IRS will mail you back a letter of Offer submission within 30 days. You will also not be required to pay taxes while the Offer submission is still pending.
After further evaluations, the IRS will accept or deny your Offer submission. If your submission is denied, you can file an appeal. Otherwise, you will have 90 days to fully pay the settlement amount.
2. Offer In Compromise Undue Economic Hardship Condition
The second legal program pertains to undue economic hardship. This is related to tax troubles arising from a taxpayer’s inability to pay for basic living expenses, as determined by the Internal Revenue Service Collection Financial Standards. Other factors that may influence the taxpayer’s financial condition are also considered.
Only the following are eligible for this Offer:
- Insolvent and/or bankrupt individuals and business entities
- Individuals and business entities that are not yet insolvent and/or bankrupt, but will experience undue economic hardship if they pay their tax liability in whole
The IRS considers a taxpayer insolvent when his or her liabilities, including the tax liabilities, exceed the fair market value of his or her assets.
While the IRS does not define the exact circumstances that may cause hardship, it specifically states that the inability to maintain a grand lifestyle is not considered hardship. The IRS also specifically states that the following are not considered as expenses that create undue economic hardship causing IRS tax troubles:
- College or university expenses
- Private school tuition
- Charitable contributions
- Credit card payments
- Voluntary retirement contributions
To file for this, you need to fill out certain IRS forms, along with other supporting documents. You also have to mail them via Certified Mail and wait for the IRS’ further evaluations and responses.
3. Offer In Compromise Doubt As To Collectibility
You can resort to this option to cure your IRS troubles if the full amount of your tax debt is greater than your assets. In this Offer, the IRS’ tax evaluation is composed of two amounts – Debt on Assets and Collectibility. The sum of these amounts will be the IRS’ required settlement amount.
The first part is the calculation for your Debt On Assets ratio. The IRS will compare your tax debt to the market value of your assets. If your assets’ value is greater than your debt, then this means your assets have enough equity to cover for your debt. The IRS will take the difference between your debt and assets as part of your settlement amount.
The second part is determining the collectibility of your tax debts. This is based on your monthly gross income and household expenses. The IRS will subtract your household expenses from your gross income. The remaining income, if any, will be multiplied by 12. The resulting product will be part of your settlement amount.
To file for this, fill out Form 656 (Offer in Compromise Booklet). The IRS’ evaluations may take from four months to a year. If your Offer is denied, you can file an appeal. Otherwise, you have five months to pay the settlement amount.
To avoid tax troubles, you can consult different authorities such as a CPA, a tax preparer, or a tax lawyer. These professionals can help you manage the different tax payment processes. They may even help you gain tax benefits. You can also learn more through the IRS’ tax tutorial program on their site. The IRS has online learning and educational products open for the public to join.
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