Offer in Compromise: How Could It Help You Settle Your Tax Debt?
What is an offer in compromise? How does it help taxpayers who have problems paying their debts to the IRS? Here’s what you need to know.
Keyword(s): offer in compromise
Did you know that Americans have over $15 trillion in debt? That averages out to be just over $96,000 per person.
With so much debt for an average person to tackle, some people get in over their heads. It can get to a point where they just do not have the financial means to keep up with their payments.
This can lead to bad things such as wage garnishment or even bankruptcy.
Are you feeling overwhelmed? Do you need to find another way to pay off this debt?
If you answered yes to these questions, consider an offer in compromise.
What is an offer in compromise? How can it help you?
This is your guide.
What Is an Offer in Compromise?
Before we can tell you how this will help you with your debt, you need to understand what this is. An offer in compromise is when you propose to the IRS or a debt collector to lower the total amount of money that you owe.
That can potentially save you tens or even hundreds of thousands of dollars. It can even lower the interest that you owe on top of this debt.
What this does is it gives people that are going through financial hardship an option to ease their burden.
However, not everybody is eligible for this. As stated above, you usually need to have financial hardship to do an offer in compromise.
What Is Considered?
According to the IRS, there are four main factors that come into play when someone is proposing an offer in compromise.
The first is your ability to pay. This should be pretty straightforward. If the IRS feels like you have the financial means to pay off your original debt, you are not likely going to be approved for an offer in compromise.
The second thing they consider is your income. How much do you make? Is it enough to keep up with monthly payments on your debt owed? The IRS will take that into consideration and if they feel like your income is not sufficient enough, that can improve your odds.
Third, the IRS will consider your expenses. What is your cost of living? How much do you pay in rent? How much money do food and clothes cost in your area?
Essentially, the IRS is factoring in how much money you need to live where you are currently located. Sometimes, even things like the gas price could come into play or cost of public transportation.
Finally, the IRS factors in your asset equity. These are pretty much anything valuable that you can offer up to help pay off your debt.
For example, let’s say that you do not make enough income or have enough savings to keep up with these debt payments. The IRS may accept that unless you have other assets that you can sell.
Some of these assets could include nicer cars, a nicer house, jewelry, memorabilia, and more. Essentially, if you have valuable assets that can help tackle your debt, you are less likely to get approved for this.
How This Settles Your Tax Debt
So, something that you may be wondering is how an offer in compromise solves your tax debt? Well, the obvious answer is that it can significantly decrease the total amount that you owe.
For example, let’s say that you had about $50,000 in debt. With an offer in compromise, they settled to collect around $15,000 from you. That right there can save you a lot of time and a lot of money when it comes to paying this debt off.
It can also help you come up with a more manageable payment plan and avoid having further interest tackled onto your debt. You can pay it off in more favorable conditions for yourself while coming up with a realistic timeline.
When your offer in compromise is approved, you have two options that you can choose from when it comes to payment.
The first option is to provide a lumpsum payment. When you apply for an offer in compromise, you would submit 20% of the total amount of money that you are proposing to pay off.
For example, let’s say that you only wanted to pay $10,000 of your $50,000 of debt. If that is your offer in compromise and you wanted to pay with a lumpsum of cash, then you would have to pay $2,000 along with your application.
The second option that you have is to stick to your periodic payments. This is usually monthly and along with your application, you would just submit a payment for this.
Once the IRS accepts your offer with this payment option, you would just continue your payments until you reach your new total.
Who Is Eligible?
Along with the income and asset requirements mentioned before, there are two other things that you need to keep in mind before applying.
You have to have filed all of your tax returns to get approved for an offer in compromise. So, if you have unfiled tax returns, you need to address that first.
The other thing that you need to keep in mind is that you cannot have an open bankruptcy case. So, if you are sure that you do not want to go that route, do not go for bankruptcy while you are considering this.
Consider an Offer in Compromise
This is how an offer in compromise can help you get out of debt and what you have to do to get approved. Go over your current income, your current assets, your eligibility, and then decide what payment option you are going to take.
Do you need help with your tax liability? Message us today to get started.