6 Considerations as You Settle Tax Debt

#1: Penalties and interest continue to accrue

Very few things stop IRS penalty accrual, including filing an Offer in Compromise. While the IRS considers your offer, penalties and penalty interest will continue to apply.  Once you reach a settlement, this stops being an issue. You pay the amount agreed, and you’re free and clear.

#2: Bankruptcy blocks tax debt settlement

Tax debt is generally resolved with the rest of your debts during a personal bankruptcy filing. So, you can’t have an open bankruptcy case and file for tax debt settlement at the same time. If you already filed for bankruptcy, the courts should resolve the issues with your tax debt during the bankruptcy proceedings.

#3: There is a possibility to get the application fee back

If you’re struggling to pay your taxes because of extreme financial hardship, that $186 application fee may be hard to manage. The good news is that if the IRS determines severe financial hardship, then they may refund the fee. They will let you know after you offer is processed whether you are eligible to request a refund.

#4: Form 433-A helps you determine an appropriate offer

You can’t just offer the IRS some random amount and expect that they’ll accept it. You also don’t have to just guess at what’s the right amount. Settlement negotiation always starts with the amount determined through Form 433-A; for the record, there is also Form 433-B if you’re applying for settlement as a business.

#5: You can make the settlement in payments

You won’t be required to pay everything back at once. You can choose the OIC Periodic Payment option. This allows you to make the settlement in installments. You basically pay the IRS each month with fixed payments. You can pay more than the minimum required amount if you have extra funds. However, you must pay the full amount agreed within two years from settlement acceptance.

#6: Defaulting on an OIC is extremely bad

If you don’t pay the amount agreed, the IRS will not be kind. You will be liable for the original tax debt, minus any payments you made. They’ll also reapply all penalties and accrued interest charges. What’s more, they will be much less willing to work with you; a second settlement agreement is highly unlikely.

How to settle tax debt yourself

You have two options to file an Offer in Compromise. You can work with a tax debt resolution service or you can try to file on your own. If you want to settle tax debt yourself, simply download the IRS Form 656 Booklet. In includes Form 656 and Form 433-A form that you need to fill out for your financial disclosure. Complete the forms and send them in to file on your own.

A word of warning about settling tax debt on your own

Form 433-A provides full financial disclosure, so it’s not exactly a short form. In fact, it’s a 10-section form. If you think filing your taxes is complicated, this is significantly more complex. And if the form is not filled out correctly and completely, the IRS will reject your OIC application.

As we mentioned above, OICs are not readily accepted by the IRS. If there’s any potential that you can pay off the full amount, they won’t accept your OIC. They will also reject you if you have any assets you can liquidate to pay off the debt.

So, proving that you qualify for an Offer in Compromise is not an easy task. Unless you know what you’re doing, we recommend working with a resolution team! It will increase your chances for a successful outcome and an accepted OIC.