What Is an Offer in Compromise from IRS and What Are Its Benefits?
The IRS is committed to working with taxpayers to ensure that they can make timely payments whenever possible. One of the arrangements that the IRS may agree to is called an offer in compromise. In our article, we will explain what an offer in compromise is and list the main advantages and disadvantages associated with it.
General Information about an Offer in Compromise
To answer the question, “What is an offer in compromise?”, we will start with what it is best used for. An offer in compromise is useful for individuals who find themselves owing money to the IRS who are not able to pay. It’s important to note that there are specific requirements in place for qualifying for an offer in compromise.
One of the easiest ways to qualify for an offer in compromise is to demonstrate your financial deadlock. Show how your current tax liabilities would put you in a situation where you cannot afford to make basic house payments or cover core necessities. Another requirement for qualifying for an offer in compromise is that you cannot be in the process of current bankruptcy proceedings.
However, financial hardship is not always a necessity for qualifying for an offer in compromise. An offer in compromise is basically an agreement with the IRS that satisfies your tax debt for less than the initial owed amount.
For this reason, many individuals opt for using this method to satisfy tax debts that they cannot normally afford to pay. Now when someone asks you, “What is an offer in compromise?”, you can answer them confidently.
The Three Main Benefits of an Offer in Compromise
1) Tax Liability Reduction
The biggest benefit we will cover in our what is an offer in compromise article is the potential for reducing your tax liability. The whole point of applying for an offer in compromise is to seek a total payment amount that is less than what you initially owed. In some cases, this amount can be thousands less than the initial amount.
The exact reduction will vary based on a wide variety of factors. The IRS takes a close look at your current assets, your monthly income, as well as your monthly expenditures. They have strict guidelines as to the types of expenses that an average user can claim each month. Using these figures, they determine a more realistic amount that the person can be expected to pay in a timely manner.
2) Stops Collection Efforts
The next benefit that is worth mentioning in our article on what is an offer in compromise is the effect these arrangements have on tax collection efforts. Once you have applied for this arrangement and the agreement has been tentatively accepted by the IRS, it stops all collection efforts relating to your assets. This is great for individuals who were worried about potential liens being placed on their property.
However, it’s important that you follow the instructions detailed in your agreement to the letter. Any deviation from the original plan can open the door for the IRS to resume its initial collection efforts. If you ever find yourself unable to make a payment, consult with an IRS representative as soon as possible. This way, you can make sure your account is appropriately noted.
3) Easy and Convenient Payments
The last benefit we will cover in our article on what is an offer in compromise deals with the flexible payment nature of these agreements. In most cases, you will be eligible to make your payments each month on an agreed schedule.
These payments are often quite affordable. On top of that, they can be automatically deducted from your checking or savings account. This simplifies budgeting and ensures that you always stay up to date on your agreement with the IRS.
In addition, agreements with automatic payment arrangements are often subject to fewer fees as well. Moreover, you can select to send your payment via check, money order, or by using your debit or credit card. However, the fees associated with these payment methods may be slightly higher than traditional bank withdrawals.
The Main Disadvantages of An Offer in Compromise
1) Numerous Qualifying Criteria
The whole point of an offer in compromise is that it is reserved for individuals who legitimately cannot afford to pay their tax bill in a timely manner. However, the IRS requires you to have exhausted all other possible realistic means.
This may include expensive options like seeking an equity line of credit on your home, paying with a credit card or other line of credit. Another option is selling certain valuable assets like your vehicle. With this in mind, you should carefully consider the core qualifying criteria the IRS has listed on its website.
When in doubt, you can use their handy IRS pre-qualifier tool on their website. It will ask you a series of questions to help you determine if you are eligible for this option. If a response disqualifies you, it will offer you information on how to rectify the situation.
2) Potential Impact on Future Tax Credits
An offer in compromise can also have a disastrous impact on next year’s tax credits. For some of the most popular credits available, an offer in compromise requires that you waive your right to them.
This point is particularly important for users who regularly rely on these types of credits to offset their yearly tax burdens. In some cases, you may end up owing money the next year as well.
To prevent this, it’s recommended that you consult a trained tax professional. Moreover, you should consider changing your withholding amount to ensure enough money is set aside for your taxes.
3) Available Via Public Record Requests
Another potential downside of an offer in compromise is that certain information on your agreement is accessible via a simple public record request.
Your personal information like your social security number will still enjoy protection. However, neighbors and other individuals in your area can find out specific details relating to your agreement with the IRS.
At this point, you should be able to confidently answer the question, “What is an offer in compromise?” As you can see from the points in our article, these types of arrangements have many distinct advantages and disadvantages. It’s important that you consider all the factors involved in your unique situation before making a final decision. If you have had first-hand experience with an offer in compromise, tell us about your experience in the comments section.