There are a lot of commercials promising easy settlement of tax liabilities for pennies on the dollar. They are usually referring to the offer in compromise (OIC) program. There are conditions that you should be aware of before using an OIC. The IRS rejects nearly 90% of Offers Submitted. You should steer clear of firms that only steer you to an OIC without giving you options for your tax debt.
- Can you pay your liability? The IRS or any other tax authority wants to collect the full amount of what they are owed. In evaluating an offer, the IRS looks at your income, expenses, assets and equity. The IRS first examines your ability to pay within a 5-6 year period. If you have the ability to pay your tax debt in full within that time, your offer will be rejected. The IRS looks at the equity of your property and assets. If you have assets that could be quickly liquidated to pay your debt in full, the IRS will likely reject the application. There are exceptions to this for property that is needed for work, business or health reasons.
- Considerations about the collections statute of limitations. The statute of limitations for the collection of tax debts is typically 10 years for federal tax debt. If you are close to the end of the collection statute, I would not recommend an offer in compromise if you can “ride out” the time remaining for collections. An OIC extends the statute of limitations and may do more harm than good.
- Privacy considerations
Before the IRS will accept an offer, they require a detailed analysis of your finances. A revenue agent may visit your home or business to insure the value of your property complies with your application. Some people do not want this. If you cannot afford to pay you may be eligible for a hardship exception known as currently non collectible status. You may have to submit financial documents such as utility bills and monthly bank statements but it is nowhere near invasive as an evaluation for an OIC.
You may be able use bankruptcy to eliminate your debt. The debt must be at least three years old. To eliminate a tax debt, the tax return must have been originally due at least three years before you filed for bankruptcy. You must have filed a tax return for the debt you wish to discharge at least two years before filing for bankruptcy. If your tax debt is from payroll taxes or related to civil penalties or fraud, then bankruptcy is