While being in debt to any creditor is stressful, owing money to the IRS can be terrifying – and with good reason. Basically, the IRS is the country’s (and probably the world’s) largest and best-resourced collection agency. If you’re on their radar screen, you’re going to stay there until the matter is resolved.
Fortunately, you don’t have to spend sleepless nights and stressed-out days trying to find a way forward — because an Offer in Compromise (OIC) may be exactly what you need.
The OIC is an IRS program that allows you to settle your tax liability for less than you owe, provided that you can demonstrate financial hardship, and that your offer (which will be verified by financial disclosure) represents the most that you can feasibly pay. If the IRS believes that you can pay your debt in full through installments or other means, they won’t approve your OIC application.
While the OIC can be the financial lifeline that you’ve been searching for, it’s very important to keep in mind that upon acceptance you’ll be subject to a five-year probation period during which you must:
- Comply with all IRS’s rules, which includes filing your tax returns on time and paying any taxes owed in full.
- Pay any additional liabilities that the IRS assesses. For example, if through an OIC you are allowed to pay 70 percent of your tax liability for the 2015 tax year, and a subsequent IRS audit of your 2015 tax return results in an additional liability, this new amount will not be grandfathered into the OIC and must be paid promptly.
Failure to meet either of these provisions will result in the OIC being revoked. If this happens, the IRS will reduce your tax liability by the amount you paid, but will also add interest and penalties up the current date. This means you’ll be worse off than when you started.
It’s also important to know that if your OIC covers a joint tax debt (e.g. joint tax return for you and your spouse), and during the probationary period one of you fails to comply with the provisions, then only the non-compliant party will be in default of the OIC. The compliant party will not be subject to having the OIC revoked for their share of the tax liability.
To learn more about qualifying for or applying to the OIC program, visit the IRS’s website at https://www.irs.gov/individuals/offer-in-compromise-1. It’s also highly recommended that you consult with an experienced tax attorney before applying, so that you can ensure you have clear, accurate information on what’s ahead – and don’t make mistakes that could result in your application being rejected; or worse, trigger a chain of events that eventually turns into a costly and prolonged IRS audit.