Based on the current economic downturn, many taxpayers find themselves unable to pay their tax bill. That’s why many request an offer in compromise from the IRS. But an offer in compromise is not for everybody. Many people believe that if they currently do not have the funds on hand then the IRS will automatically settle on the tax debt. This is simply not the case.

Prior to submitting your request for an offer in compromise, make sure that you explore all other options first. You may be able to borrow funds from family or friends and or even be able to take out a personal loan.

Taxpayers must file Form 656 if there is uncertainty that the tax liability could be collected in full via a lump sum payment or an installment agreement. Taxpayers should file Form 656-L when they believe that the tax liability claimed by the IRS is incorrect. You are not allowed to file offers simultaneously and claim both that the tax liability is incorrect along with an inability to pay the tax liability due.

One issue that many taxpayers fail to pay close attention to is making sure that all the required information gets properly submitted on a timely basis. If you don’t send the IRS the proper information or if your information is incomplete it will substantially delay the process. It may then take months to get information as to whether the offer in compromise was accepted.

Along with your completed forms you must make sure that you make the required payments. The general rule that you must follow when determining how many offers and the related application fees due is that there is one payment fee and form per entity. Form 656-B contains an application fee and a payment matrix that will help you determine the number of forms that must be filed and how many application fees are required.

If you want any hope of success you must make sure that you stay current with all your tax filings and payment requirements, including estimated taxes and federal tax deposits. Becoming delinquent or filing late could put an end to any chance of success you may have had.

An offer in compromise is not for all taxpayers. Most will not qualify because they have financial resources or the ability to make installment payments. If you believe that you qualify make sure you are diligent in your efforts and provide the necessary paperwork. Then be prepared to wait.

As the criteria for installment payment plans center on the ability to pay, so does an offer in compromise. The IRS will consider normal household expenditures in the application, but getting qualified is not always easy.

The rejection rate is very high. This often is the case as submitted documentation is often incomplete, the taxpayer is delinquent with tax filings or the taxpayer earns above the required financial allowance. Make sure you review your application in detail and submit the required information.

If the IRS sends you a response, make sure that you respond promptly. You may only have a few weeks to get the final information prepared and submitted back to the IRS. Failing to timely respond is often a reason for rejection.

Upon final review, the IRS assesses the taxpayer’s collection potential. This is where many offers breakdown. The taxpayer may not have the funds currently, but they are generating income and have the ability to pay off the entire balance over time. Under these circumstances, the IRS would prefer an installment agreement rather than an offer in compromise.

But completing and filing all the required offer in compromise forms can be a daunting task. You may need to seek the help of a qualified professional, including CPAs and tax attorneys. Completing the forms correctly the first time is of great importance.

Taxpayers must file Form 656 or Form 656-L. Be advised that if you have a tax lien on record prior to acceptance of the offer, the lien will not be released until the offer terms have been satisfied or until the tax liability is paid in full, whichever occurs first. A Notice of Federal Tax Lien is often filed during the course of an offer in compromise settlement investigation.

Not only is it critical to file your forms timely, you must make sure that you carefully reply to any IRS correspondence. The IRS may request additional information in order to process your offer.

Taxpayers must submit $150 with the offer in compromise forms. Some taxpayers may be exempt from the fee depending on their income or whether or not the offer is based strictly on doubt as to tax liability. Taxpayers who claim the poverty guideline exception are required to certify that they are eligible by filing Form 656-A, Income Certification for Offer in Compromise Application Fee.

The IRS will maintain a record of all payments made or applied to the total original income tax liability before the offer was submitted. The IRS can also keep any proceeds from levies that were served prior to submission of the offer in compromise settlement, but that were not received at the submission date of the offer.

Remember that if your offer in compromise settlement is accepted, you are required to timely file all income tax returns and make timely tax payments for five full years or until your offered amount is paid in full, whichever time period is longer. If you fail to adhere to these conditions, it can result in default of the offer and the IRS can then collect the amounts originally owed plus any penalties and interest.

The IRS has made great strides in improving the processing of OICs. These efficiencies are making it easier for taxpayers to navigate the OIC process and enable them to receive responses in a timely manner. When an OIC is submitted, the IRS will verify that it can process the offer. The offer will be processed if the taxpayer has: (1) paid the $150 application fee; (2) filed all back tax returns; (3) is not actively involved in a bankruptcy proceeding; and (4) not been involved in an on-going audit.

During the verification stage of the IRS offer in compromise, the IRS examines all of the financial information that was provided by the taxpayer in the application.  Supporting documentation is reviewed and the financial claims (income, property ownership, etc) are analyzed. If the IRS needs additional information they will generate an Offer Verification Letter that will be submitted to the taxpayer. This letter requests the necessary documentation that the IRS needs to further process the return.

The taxpayer has a few weeks to respond with the requested items. If the response is not timely, the IRS can return the offer and dismiss the offer if need be. If the offer is returned, the IRS will not refund the processing fee.

The IRS then assesses the taxpayer’s potential for collection. As a result, the agency has the right to accept the IRS offer in compromise as it was submitted originally. They often may send a letter summarizing the collection potential analysis. The taxpayer has the right to respond to the analysis with any documentation necessary or can dispute the IRS findings. The taxpayer also has the right to accept the IRS’ analysis and agree to increase their offer to the amount that is shown in the analysis letter.

The IRS offer in compromise can be rejected outright after review of the analysis is completed. If the taxpayer does not agree with the analysis, they have the right to file an appeal. At this stage, the taxpayer can submit additional documentation (if needed) and make additional arguments in support of their position.

A tax offer in compromise is merely an agreement between the IRS and a taxpayer whereby the taxpayer’s tax debt is settled for an amount that is less than the full balance that is owed. Generally, the IRS will not accept an offer in compromise if it feels that the tax liability can be paid off in full either in a lump sum payment or through an installment agreement.

Always make sure that a tax offer in compromise is submitted as a last resort. You must review other payment options to determine if there is a chance that you may be able to pay off the debt either by taking out a loan or from other resources you may have.

Taxpayers are required to file Form 656 or Form 656-L when they feel that the tax liability is inaccurate. In most instances, taxpayers must submit Form 433-A or Form 433-B to provide collection Information. Neither of these forms are required when a taxpayer submits an offer solely based on doubt as to the existence of the tax liability.

Once the applicable forms are filed, make sure to respond promptly to any additional requests the IRS may have. Often the IRS will just need clarification on your personal information or financial situation. A timely response will make it easier to get a tax offer in compromise accepted.

Don’t forget to pay your application fee or your offer could be rejected. For married couples who have the same joint tax liability, they can file just one Form 656 and list the joint liability. A fee of $150 must be attached to the form. When a married couple has a joint liability and one of the spouses has an individual tax liability, two offers and two application fees are required.

An important step in the process is making sure that you are current on all your tax filings. It will not look good to the IRS if you are not filing tax returns or making timely tax payments.

A tax offer in compromise is available to all taxpayers, although it may be difficult to qualify. The goal of the IRS is to accept the offer when it is in the best interest of both the taxpayer and the government. In addition, the IRS wants to promote voluntary compliance with all future filings and payment obligations.

Often there are circumstances that arise when a taxpayer has accumulated a substantial tax liability that clearly exceeds any ability to pay in a lump sum. In this situation, the taxpayer should consider hiring an Offer in Compromise attorney to handle the negotiations with the IRS.

The IRS applies the same collection standards utilized in installment agreements to offers in compromises. They will allocate an amount for clothing, food, housing related costs, vehicle transportation, and medical or dental costs. They will also consider any legal cash commitments like student loans, alimony and child support. Ultimately, based on this analysis, the IRS determines whether it is possible to grant relief under an offer in compromise.

Most offers in compromise are denied as the IRS recently stated that over 83% of the offers are rejected. The two main reasons that rejection occurs is because the documentation is inaccurate or incomplete or the taxpayer earns in excess of the required allowance. Your offer in compromise attorney will make sure that your filing is accurate and complete.

Upon submission of the OIC, the IRS must verify that the offer can be processed. The offer goes through a screening process to determine if the taxpayer or taxable entity has: (1) paid the required application fee; (2) ensured that all delinquent tax returns have been filed; (3) not instigated a bankruptcy court proceeding; and (4) not been issued an audit notification.

Hiring an offer in compromise attorney can help you improve the chance that your offer will get accepted. At a minimum they can review your situation and provide you valuable information that will allow you to make an informed decision.

In most circumstances, the Deferred Periodic Payment Offer in Compromise is the most expensive and, therefore, worst option for a taxpayer. Net monthly income is calculated as far as the Statute of Limitations on the most recently accrued tax liability extends, which can mean calculating up to ten years of collection potential (this time period may be extended by certain circumstances, such as by the individual filing for bankruptcy). It should also be noted that if the total liability will be paid off before the Statute of Limitations expires, then the payments would cease at that point.

To contrast to the other types of payment options, let us say that a taxpayer has $50 net monthly income. For a Cash offer, that figure would be multiplied over a period of 48 months, coming to $2,400 of collection potential. For a Short Term Periodic Payment Offer in Compromise, it would be multiplied across 60 months, totaling $3,000. But, if the tax liability would not be paid off before the expiration of the statute of limitations, the $50 per month would be multiplied, in many cases, over the subsequent nine years, totaling $5,400.

Individuals considering the Deferred Periodic Payment option would be advised to also consider an installation agreement. That said, all financial situations are different, and the taxpayer is advised to either research his/her options thoroughly before deciding on a course of action. For example, if tax debt were accrued years previous to the Offer, and the Statute of Limitations had not been extended, it could conceivably benefit the taxpayer to opt for this payment method.

Probably the most important component of submitting a tax offer in compromise is section 9 of Form 433-A, otherwise referred to as the Monthly Income and Expense Analysis. It provides the basis by which the filer’s monthly income is weighed against their expenses, resulting in what the IRS calls the filer’s reasonable collection potential (RCP).

To ascertain the validity of the individual’s expenses, the IRS refers to a set of national standards for foodstuffs, clothing, and household upkeep, to which only Alaska and Hawaii serve as exceptions. By and large, filers need not verify most of these basic expenses.

Housing expenses are based upon a figure derived from regional averages of monthly expenses. In addition to these figures, the Offer in Compromise Guidelines grant two types of transport costs. The first implements a national average of the cost to own, compiling car payments of all types, including lease or monthly lien payments. The next accrues gas, insurance, and maintenance expenditures based on regional values. Alternatively, should the filer be reliant upon public transportation, the IRS uses another number.

Unfortunately, the previous values for living expenses, housing, and transportation serve a set of de facto standards that provide the IRS with distinct fundamental amounts not to be exceeded by claimed costs in the amount credited to any individual. This opposes stipulations in the Internal Revenue Code that dictate a certain amount of flexibility regarding the specific case of each citizen. But in reality, the IRS only deviates from these norms extremely rarely.

Before filing Offers in Compromise, it is important to consider the different payment methods available. Although there are a number of different payment methods for fulfilling an Offer in Compromise, two stand out as the most frequently implemented strategies: the Cash and the Short Term Deferred Offers.

The Lump Sum variety is an Offer of a single payment that covers the full amount of the negotiated liability. The general idea is to take care of the entirety of the debt in one payment. That said, this is often not exactly the case. In addition to the $150 processing fee, 20% of the total Offer is included with the necessary documentation, and the taxpayer may schedule up to five installments to pay off the tax debt.

Short Term Periodic Payment, or Short Term Deferred, Offers in Compromise divide the back taxes into smaller, monthly payments, usually over a two-year period. That means that the total tax debt is divvied up into 24 monthly payments. When sending a Short Term Periodic Payment, the taxpayer must include the first monthly payment in addition to the processing fee, and continue to make the payments, as the Offer schedules them, until the IRS takes action, whether it be acceptance, return, or rejection. Failure to pay will give the IRS the right to return the Offer.

It should be noted that neither of these solutions are better than the other; rather, it depends on the taxpayer’s financial situation. Please make sure to review your circumstances carefully.

On the fifteenth of July, 2006, the IRS changed its policies regarding the Offer in Compromise. Firstly, the amount of time for the assessment has changed, and the IRS now has two years after it judges that the request has met all requirements to process it. If the two-year time limit expires, then the Offer is accepted.

Secondly, payments must be enclosed with Offers in Compromise. Now, all individuals who file must enclose a partial payment of the total Offer amount, the portion of which is determined by the type of Offer in Compromise.

For example, taxpayers submitting cash offers, which must be paid in full in fewer than five installments, must enclose one-fifth of the amount when they submit the OIC. So, if the Offer is $1000, then $200 must be included in addition to the initial processing fee ($150). If these payments are not attached in full, the IRS will return the request without the possibility of appeal.

Taxpayers submitting a deferred Offer must include the first payment of the proposed installment plan, and continue to submit payments in accordance with the plan laid out in the OIC until the IRS either accepts, returns, or rejects the request. If the individual filing the Offer does not make any one of the scheduled installments, the request will be rejected. In either case, no matter the type, the IRS will not send back any funds sent to them while an Offer is being appraised if it is rejected, returned, or withdrawn.