Say that you owe $50,000 in back taxes, fees, penalties, and interest. Unfortunately, between your bank account and your equity in assets, you don’t have $50,000. You’ve explored IRS installment payment agreements, but you can’t find a way to make it work while still managing your basic living expenses. Even over the course of three years, you won’t be able to pay the total and still meet your basic needs. When your future income possibilities barely begin to cover your tax liability, you’re a good candidate for the Offer in Compromise program.

Contact the IRS and plead your case by filling out a Form 656-B to start the application process. On your OIC application, you must show proof of your assets and income, which can include the following:

• Estados de cuenta bancarios
• Evidence of monthly disposable income
• Account balances
• All requested documentation of your financial situation

The point of this is to demonstrate to the IRS that paying the total amount you owe will cause extreme economic hardship. Note that future income expectations and expenses can affect your reasonable collection potential in the IRS’s eyes, specifically through these key factors:

• Ability to Pay: The IRS will analyze your current financial situation (income, expenses, and financial obligations) to assess whether you have the means to pay your tax liability in full.
• Asset Equity: The IRS will evaluate your assets (real estate, vehicles, and savings) to determine how much of your total tax liability could potentially be covered by liquidating those assets.
• Ingresos: Your monthly income and financial statements will be reviewed to calculate a reasonable collection potential that would fit a payment plan. Consistent income may indicate a greater ability to pay while low or unstable income levels may suggest a need for tax relief. Low-income taxpayers may even get their OIC application fee waived.
• Monthly Expenses: The IRS will look at your monthly basic living expenses (such as housing, utilities, food, transportation, and medical costs). If your expenses are high relative to your income, it may support your claim for an OIC.
  Current and Future Financial Situation: The IRS may consider any foreseeable changes in your financial circumstances, such as a job loss, impending medical expenses, or other factors that could impact your ability to follow the payment plan.
• Length of Time to Collect: The IRS will assess how long they would need to wait to collect the full amount owed. If your monthly income makes your monthly installments stretch too long, they’ll be more inclined to accept a lower offer.
• Compliance History: Your previous compliance with tax obligations can influence the IRS’s decision. A taxpayer with a history of on-time income tax returns and no tax liens has a better chance of having their Offer In Compromise application accepted.
• Reason for Tax Debt: The circumstances surrounding your tax debt, including whether it was due to an unforeseen event (such as the diagnosis of a medical condition or sudden severe economic hardship), can also play a role in the IRS’s decision-making process.

Through negotiations, you offer to pay $15,000 to settle your $50,000 tax bill. The IRS reviews your financial situation, assesses that you are qualified for this compromise, and agrees. You’ve made an Offer in Compromise agreement!

As a taxpayer, you have no legal right to settle your taxes owed for any less than you owe. The only legal requirement is that you pay your taxes owed; the rest is up to the IRS’s discretion and what they can do before the collection statute expires in 10 years.

When it comes to your Offer in Compromise, it’s imperative that you have a solid argument as to why you should settle for less. Working with a tax professional when pursuing an Offer in Compromise can help you make your claim. A professional can help manage the negotiation process and communicate with the IRS on your behalf. In the end, you’ll pay less than you owe, and your slate may be wiped clean.

Applying for an Offer in Compromise can be stressful, particularly if it’s on top of existing financial strain, but getting a qualified tax advocate on your team can ease these burdens. Our tax law professionals can help ensure your OIC application is complete, your documents are in order, and your argument is as strong as possible.

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