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How does a tax offer in compromise work?

Posted on June 21, 2021

An offer in compromise is an agreement between the taxpayer (or business) and the IRS that settles a tax debt for less than the full amount owed. It is an option when a taxpayer can’t pay their full income tax bill owed, or when paying the entire tax bill would cause the taxpayer a financial hardship.

How does one begin the offer in compromise process?

The goal of the IRS in offering this program is coming to a unique financial agreement that suits the best interest of both the taxpayer and the agency.

Taxpayers begin by filling out an application. Both business and personal forms can be found on IRS.gov or your CPA can help you begin the process. Since most CPAs have had experience with pulling together the paperwork involved in settling tax bills, they are a great place to start – especially if your small business is in arrears.

Once the taxpayer has filled out the form and the paperwork, the IRS will review the application. The IRS is very circumspect in considering the taxpayer’s unique set of facts and any special circumstances affecting the taxpayer’s ability to pay, including:

  • Income
  • Expenses
  • Asset equity

Individual taxpayers and business owners can use the IRS’s recently updated Offer in Compromise Booklet to learn how an offer in compromise works and decide if it could help them resolve their business or personal tax debt.

The booklet covers everything a taxpayer needs to know about submitting an offer in compromise, including:

  • Who is eligible to submit an offer
  • How much it costs to apply
  • How the application process works

The IRS Offer in Compromise booklet also includes the forms that taxpayers must complete as part of the compromise process. Although the current application fee is $205, taxpayers who meet the definition of a low-income taxpayer don’t have to pay this fee.

The CPAs at Teipen CPA Group can also work on your behalf with the IRS to help navigate the confidential process, and negotiate a settlement – in most cases, in less time than the taxpayer alone can. We’re here to help.