Some people claim that the Internal Revenue Service (IRS) is one of the largest collection agencies in the world. That comparison exists because the IRS reconciles estimated tax payments with an annual tax return and may then pursue collection activity against taxpayers with balances due.
Individuals and businesses alike can potentially accrue sizable tax debts due to underreporting income and other issues. After the IRS sends notice of a tax deficiency, people with outstanding balances due often panic because of the possible complications.
Tax debts tend to increase over time due to fees assessed by the IRS and the accumulation of interest on the amount owed. Those trying to take control of their situation and avoid escalating collection efforts may want to consider proposing an offer in compromise to settle their income tax debt.
What is an offer in compromise?
A review of personal or business assets and likely income can quickly make it clear that a taxpayer is unable to pay their tax debt in full immediately. Depending on the financial circumstances of the taxpayer, they could be in a situation where the tax debt may continue to increase because they cannot pay it off promptly.
An offer in compromise is essentially a settlement proposal made to the IRS regarding income tax debt. Taxpayers usually have two options when proposing an offer in compromise. The first option is to propose a lump-sum settlement. Those with some liquid resources may be able to make a single, sizable payment that represents part of the balance due. The IRS may accept a partial lump-sum payment and forgive the remaining balance due from the taxpayer.
When an individual has regular income, they can propose a series of structured payments. They can slowly reduce the balance that they owe with payments that fit into their current household or operating budget. Offers in compromise can be mutually beneficial, as the IRS receives payment, and the taxpayer can protect themselves from collection activity while reducing the final amount they pay the IRS.
Proposing an offer in compromise can be a challenging process, especially for people unfamiliar with IRS standards. Taxpayers hoping to settle their debts often require guidance and support as they communicate with the IRS about their debts, and that’s okay.
