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What is an offer in compromise?

On Behalf of | Jun 26, 2023 | Tax Law |

When someone has a substantial outstanding tax debt, the IRS may allow them to use an offer in compromise. This opportunity isn’t be offered to everyone, and its availability is decided on a case-by-case basis. But it can be a tactic to resolve the tax issue for both sides when it’s offered.

Generally speaking, what an offer in compromise does is set up an agreement wherein the debtor will pay less money than they owe. The IRS will then accept the smaller payment and settle their liability. The rest of the taxes will no longer be owed. For instance, someone may owe $200,000 in back taxes, but they may get an offer in compromise for $50,000. The rest of the debt will be forgiven if this payment is made, so they don’t have to worry about paying the remainder back later.

Why wouldn’t someone qualify?

There are many reasons why someone would not qualify for this opportunity. First of all, if there’s any evidence of tax fraud or something of this nature, a debtor is not going to be given an offer in compromise. The person needs to have filed all of their tax returns accurately, and to the best of their ability, but simply failed to pay the amount that they needed to.

Another potential issue could arise if an installment plan would be possible. The IRS may determine that the full tax balance can be paid over time. Instead of an offer in compromise, it could offer an installment plan for the next 12 months, for instance. An offer in compromise will generally be used if it seems like an installment plan isn’t feasible or affordable.

Why does the IRS use this system?

People are sometimes confused as to why the IRS would allow people to pay less than they owe. Wouldn’t it want to force everyone to pay the entire balance owed? But the goal of an offer in compromise is simply to settle the account when it appears that that tax debt will never be paid otherwise. The IRS would rather get that $50,000 than nothing when it knows that the $200,000 is not going to be paid back.

Exploring your options

Are you facing significant debt that you need to figure out how to resolve? It’s important to look into all of your options when dealing with the IRS concerning tax debt, as more opportunities to manage or resolve your debt could be available to you than you might initially suspect. Seeking legal guidance is a good place to start.


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