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All tax returns must be filed before an Offer in Compromise

It may become impossible to stay ahead of tax debt as penalties and interest add to the balance. An offer in compromise (OIC) may provide some relief. It is a way to settle with the IRS for less than the full amount you owe.

A prerequisite, however, is to file all required tax returns. The IRS will not consider an OIC application if you have unfiled returns. This does not apply to the current year though if you have received a valid filing extension.

What the IRS considers

An application is only granted when payment of the full tax bill would create a financial hardship. After a comprehensive review of:

  • Income;
  • Expenses; and
  • Asset Equity

the IRS will determine your ability to pay. If the offer amount is in the same ball park as what the IRS determines it could reasonably collect, the IRS will generally approve the application. It can take six to nine months to receive an answer. If you don’t hear back within two years, your offer is automatically accepted.

You can find out if you qualify by using the Offer in Compromise Pre-Qualifier tool. For example, if you are in an open bankruptcy proceedings, you wouldn’t be eligible. You may be able to discharge some tax debt in the bankruptcy proceedings, however.

In another post, we will discuss the OIC application process in more depth.

An experienced tax attorney can review your situation and discuss available options. It is important to investigate other courses of action before considering an OIC. And determining the right amount to offer is more art than science and can affect whether an offer is accepted.

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