Offers in Compromise
How to settle a tax bill with the IRS for pennies on the dollar using an offer in compromise.
It is sometimes possible to wipe your tax slate clean at an enormous discount. If you qualify for something known as the offer in compromise, referred to as an "offer" or "OIC," the IRS has been known to accept as little as 1% of the amount owed on a tax bill and call it even.
There is no legal right to have a valid tax bill reduced by the IRS -- it is entirely a matter of government discretion. In all but a few instances, however, the IRS must at least give a properly submitted OIC fair consideration. Unfortunately, fewer than half the OICs submitted are accepted by the IRS, although you do have the right to take a rejected OIC to the IRS Appeals Office.
OIC Process
Submitting an offer to the IRS is a formal process -- you can't simply call the IRS and say "Let's make a deal." You start by completing IRS Form 656, Offer in Compromise .
There is a $150 application fee for filing an OIC, which you must attach to Form 656. You might be exempt from the fee if your monthly income is below the poverty guidelines. If you claim the poverty guideline exemption, you must submit an Application Fee Worksheet from the Form 656 booklet.
In addition to Form 656, you must submit a Collection Information Statement, or Form 433-A. If you are married and live in a community property state, the IRS may request that your Collection Information Statement include data on your spouse -- even if you alone owe the IRS. Take particular care in filling in this form correctly if you are serious about your OIC. The IRS scrutinizes the disclosures you make in this form much more closely when considering an OIC than when you request to pay your taxes with an installment agreement.
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