An offer in compromise is a collection alternative option for those who owe taxes to understand and consider. Taxpayers who owe taxes should understand how an offer in compromise works and may be able to help them settle or reduce their tax debt.
An offer in compromise is an agreement between the taxpayer and the Internal Revenue Service (IRS) that allows the taxpayer to settle their tax liability for less than the full amount of taxes owed. To qualify for an offer in compromise, the taxpayer must have filed all tax returns, made required estimate tax payments for the current tax year and met other requirements if the taxpayer is a business owner with employees.
Whether or not the taxpayer will have the opportunity to enter into an offer in compromise agreement will depend on a variety of factors. Factors that will be considered include the amount of the taxpayer’s tax obligation, the taxpayer’s assets, the taxpayer’s income, the taxpayer’s expenses, the size of the taxpayer’s household, the length of time remaining for the IRS to collect any past due taxes and other factors as well.
There are several reasons that an offer in compromise may be accepted by the IRS, such as if there is a doubt as to liability or collectability, and also certain thresholds that will need to be met such as if the offer in compromise is equal to, or greater than, the reasonable collection potential as measured by the taxpayer’s ability to pay. An offer in compromise may also be accepted in certain circumstances of economic hardship or if collection of the tax debt would be unfair because of exceptional circumstances. All of these potential options are important for taxpayers seeking a collection alternative, such as an offer in compromise, to be familiar with.