When individuals are hit with a substantial tax bill that they can't pay out of pocket, many may panic. However, there are several options available for those who are unable to cover their liability in full, and one of the most common for distressed Americans is an offer in compromise.
The Internal Revenue Service's offer in compromise program allows eligible taxpayers to settle their tax debt for less than the full amount they owe. While this program can help individuals get out from under their balances, there are guidelines that they must meet in order to qualify. According to the IRS, it will generally agree to allow taxpayers entry to the program when the amount offered represents the "the most [it] can expect to collect within a reasonable period of time." When determining eligibility, the federal agency takes a number of factors into account, including ability to pay, income, expenses and asset equity.
Setting an amount to pay
The IRS typically accepts roughly 34 percent of applications to the program each year, and determining an amount to pay is the next step that can be somewhat difficult. The agency relies upon a strict formula to determine the amount to be settled, but it's the variables of the formula that can be challenging for individuals to understand. For example, the IRS calculates "allowable" expenses into the formula and also makes determinations about expenses based upon national averages.
This means that if individuals are living in a home that is priced higher than the national average, the IRS may only allow that national average to be considered. In addition, what individuals consider an essential expense may not be viewed in the same manner by the IRS. For instance, individuals may consider their credit card payments as viable expenses, but the IRS may take the stance that a taxpayer's obligation to pay their tax debt supersedes their credit card obligations, Fox Business reports.
As a result of these complexities, Americans are generally urged to explore payment plan options first. If determining that installment plans are not the right course of action, working with a licensed tax preparer to best understand how the IRS calculates its variables may be in a person's best interest, because professionals can help educate their clients on their eligibility for an offer in compromise, how their unique circumstances may be assessed and how to go about the application process.
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