A ‘Fresh Start Program’ (referred within the legal community as an ‘Offer in Compromise’) is a plausible path for someone who is unable to pay their taxes in full. It allows people to settle their tax debt for less than the entire amount they owe. Whether this path is available to a taxpayer depends on a few questions surrounding his or her circumstances: Do they have the ability to pay? What is their income? What kind of expenses are they facing? Do they have any asset equity?
An offer in compromise is generally accepted when the amount offered to compromise is the maximum that can be reasonably expected over a certain period of time. It is heavily advised that you explore all your options before deciding on pursuing an offer in compromise. If you do elect to attempt to make an offer in compromise, call an experienced tax attorney that is adept in working through offers in compromise with the IRS.
The first step to ensure you are eligible for an offer to compromise is be up to date with all filing as well as payment requirements. After that, the IRS website has a short quiz you can take to check your eligibility. You can find the questionnaire at https://irs.treasury.gov/oic_pre_qualifier/ One fact worth noting is that individuals going through an open bankruptcy proceeding are not eligible.
If you are eligible for an offer in compromise, begin to prepare a preliminary proposal. The IRS has step-by-step instructions along with all the necessary forms to complete an offer in compromise on their website in booklet form here: https://www.irs.gov/pub/irs-pdf/f656b.pdf
Once you have read the instructions and reviewed the related booklet, your completed offer package will include Form 433-A or B (A, if you are and individual and B, if you are submitting for a business), a Form 656 (tax debt information). If you are making an offer for you and your company, you must fill out separate ones for each. There is an application fee and initial payment for each offer you complete.
Then it will be time to submit your offer.
You can either submit a lump sum or choose to pay periodically. The initial payment can vary based on the individual offer and which option selected to pay it with. If you choose the lump sum you must send a payment of 20% of your total offer with your application. Once you have received word of your offer’s acceptance, you must then pay the remaining balance with five or less payments. If you choose the periodic payment, you need to submit your initial payment and then continue paying through monthly installments while the IRS considers your offer. If the IRS decides to accept your offer, continue your monthly payments until the debt is paid off.
There is a way to avoid application fees, initial payments, and the monthly installments that must be paid during the evaluation of your offer. If you qualify for the Low Income Certification, your fees will be waived, and you can wait until you are accepted before making monthly payments. See the booklet for more details.
While the IRS is considering your offer, a few other things can or will be occurring simultaneously. Your nonrefundable payments and fees will be put towards your tax liabilities. If you want, you can choose the year and debt they will be applied to.
All other collection activities will be stopped until your offer is either accepted or denied. A Notice of Federal Tax Lien can be filed. You must continue to make all payments required by your offer, but if you have made another installment agreement, you are not required to make those payments. Legal assessment and collection periods will be extended.
If two years pass and the IRS has still not made a decision, your offer is automatically accepted.
If the IRS accepts your offer, a few things happen. You must meet every one of the offer terms listed by Section 8 of Form 656. All refunds that are due within the year will be applied to your debt. All liens that have been placed on you will not be dismissed until all terms are met. You can find more information at https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise-public-inspection-file-locations.
Should your offer be rejected, you have 30 days to request an appeal by using the Request for Appeal of Offer in Compromise Form 13711, found here: https://www.irs.gov/pub/irs-pdf/f13711.pdf. There is an online self-help tool that can aid with appealing your offer. You can find it here: https://www.irs.gov/individuals/appeal-a-rejected-offer-in-compromise-online-self-help-tool-start
Don’t communicate with the IRS regarding an audit or tax debt until you read ‘Cohen’s 12 Rules for Dealing with the IRS’. Submit your email below to receive a PDF copy of this 1-page checklist.
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