If the amount of tax you owe the government is putting undue financial pressure on you, an Offer in Compromise may help with your debt situation. Such an agreement between you and the IRS means you pay a decreased tax debt. Consider the following to see if an Offer in Compromise may work for you.
Before the IRS can consider an Offer in Compromise with you, you must meet these eligibility requirements:
- You cannot be in an open bankruptcy proceeding.
- You must be current filing all of your federal tax returns, and you need to have paid all of your estimated tax payments.
- If you are self-employed and have employees, you must also have submitted all federal tax deposits as required.
The IRS agrees to offers in compromise based on a few factors. First, they look at your income and the likelihood that you will be able to pay off your tax bill with the income you earn. Second, they look at your expenses, which also give them an idea if you are capable of paying your tax liability. And third, they view your asset equity, which also indicates your ability to pay.
Reasonable collection potential (RCP)
Using the above three criteria, the IRS determines your Reasonable Collection Potential (RCP), which they derive after looking at how much your various assets are worth and your anticipated future income minus your basic living expenses. Generally, the IRS will only accept an Offer in Compromise if the amount you offer to pay is equal to or more than your RCP.
If you are granted an Offer in Compromise, you can choose to pay the tax off all at once, in a few payments, or in monthly installments. Either way, you are required to make an initial nonrefundable payment and pay a $150 application fee while the IRS considers your offer.
If unpaid taxes are adding to your financial stress and you qualify, an Offer in Compromise may be the answer to lighten your financial burdens and help you better address your debt.
About the Author:
Julie Bawden-Davis is a Southern-California-based writer specializing in personal finance and insurance. Since 1983, her work has appeared in a wide variety of publications, including Family Circle, Ladies' Home Journal, Parenting, Entrepreneur and The Los Angeles Times.