When can an Offer in Compromise help you settle back taxes?

When back business taxes mount and you cannot fully pay them off without suffering a hardship an Offer in Compromise may provide a fresh start.

An Offer in Compromise allows a taxpayer to settle a tax debt with the Internal Revenue Service for less than the full amount owed. A financial hardship must exist, however. The agency closely investigates the taxpayer's ability to pay before accepting an Offer in Compromise.

In the last fiscal year, the acceptance rate for OICs increased to 42 percent. The IRS received approximately 74,000 requests and accepted 31,000. The acceptance rate has been on the increase since 2009 when the rate hovered near 20 percent.

These acceptance rates bear out the fact that an OIC is not right in every situation. An experienced tax attorney can advise whether your circumstances might satisfy the hardship threshold.

Are you eligible?

You need to be current filing your tax returns or your OIC will not be accepted. An open bankruptcy also makes you ineligible, but outstanding tax debts are usually dealt with through the bankruptcy. The agency has developed a pre-qualifier tool that can help you determine eligibility.

The IRS often uses schedules to determine whether a taxpayer would have adequate means to pay for basic living expenses while repaying the full amount owed. Hospitalization for many years that prevents an individual from managing financial affairs might be enough to support an offer. In contrast, an offer of $50,000 to settle a tax liability of $83,755 was rejected even though medical and psychological issues were present. The settlement officer found that the taxpayer's owed two homes, four cars, could meet their daily living expenses and still have funds for retirement after paying the tax liability in full.

Putting together a compelling case for an OIC requires evidence that repaying the tax liability in full will pose a serious hardship.

How do you make an offer?

An individual files Form 433-A while a business files 433-B along with a non-refundable $186 application fee. If you owe both individual and business taxes, two forms and two application fees are required.

In addition, an initial payment of 20 percent of the total offer is required. You can wait for acceptance and pay the remaining balance in five or less payments. Another option is to continue paying monthly installments while the IRS is considering the offer. Non-refundable payments are applied to the tax liability.

Those who meet Low Income Certification guidelines do not need to send an application fee or initial payment.

A Federal Tax Lien may still be filed, but other collection activities stop. If an offer is rejected, you have 30 days to appeal by filing a Request for Appeal of Offer in Compromise. If you have substantial business or individual tax debt, a tax attorney can answer questions about whether an OIC might provide you with a fresh start.

Keywords: Offer in Compromise, IRS tax collection, IRS audit