One of the most stressful financial situations some Americans face is lacking the funds to pay their outstanding tax bills. Many people who have had a run-in with the Internal Revenue Service understand that tax liabilities supersede other types of debt, and the federal government has the ability to garnish wages and impose liens on those who let their bill go unpaid. However, this typically only occurs when individuals fail to work closely with their tax preparer and the IRS to reach a payment compromise. In addition to installment payment plans, one of the most highly utilized repayment programs is the offer in compromise. Before enrolling in this program, however, it's important for Americans to understand how it works.
An offer in compromise is an agreement between the IRS and the taxpayer that allows the latter to pay a lesser amount than what they truly owe. For example, if a person owes a $25,000 tax liability, an offer in compromise may allow them to only pay $10,000 or $15,000. While these programs sound ideal, it's critical to know how the agency assesses an individual's ability to qualify for the plan and what the taxpayer's responsibilities will be after enrollment. Generally, the IRS will only extend these plans to those who are deemed unable to make a full lump sum payment or carry a liability that is too high to enroll in a payment plan. Therefore, those who owe small amounts are unlikely to qualify. Recently, the agency relaxed its standards to offer more flexibility to taxpayers, but regardless, the IRS typically only accepts 34 percent of applications for the program.
Enrolling in the program
If individuals discuss their financial situation with their tax preparer and determine that it's the best option for them, they should sit down and determine what they are prepared to offer. Although the tax agency may accept a smaller amount than what is owed, they will not accept zero dollars. People should also consider mitigating circumstances that may affect how much they can feasibly pay. For example, if a couple has a child with special needs who cuts into a large portion of their income, the IRS may take these costs into consideration when negotiating a pay-off amount. The same is true if taxpayers themselves have chronic illnesses or health issues that may hinder their finances or ability to make payments.
Ultimately, the IRS and the individual will have to negotiate the final settlement amount. But understanding how the IRS weighs eligibility and takes certain conditions into consideration can help taxpayers settle for a more affordable amount.
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