A penalty isn’t always imminent when you owe the IRS money in Texas and find it difficult to pay them right away. There are steps you can take to resolve your debt, one being to offer in compromise.
Explaining an offer in compromise (OIC)
An offer in compromise is an agreement between a taxpayer and the Internal Revenue Service to resolve their tax liability for less than the amount they owe. Some factors the IRS considers when evaluating offers include:
- Ability to pay
- Asset equity
How the offer in compromise works
The first step is to submit an application which includes a completed Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses and a non-refundable application fee. However, individual taxpayers don’t require to pay this fee if they qualify for a low-income exception.
Next, you’ll need to submit an initial payment called a “process fee.” The amount is based on the type of tax liability and whether it’s an individual or business offer. After the IRS accepts your application, they will contact you to set up a payment plan for the remaining balance.
If you default on the payment plan, the offer will be void, and your original debt plus interest will become immediately due. Failure to meet up expectations can lead to tax penalties.
The two payment options you have
The first is a lump sum cash offer, where you pay the total amount of your offer upfront or in installments. The IRS describes it as “the offer must equal the realizable value of your assets and future income.”
The second is a periodic payment offer, where you make payments over an extended period until the total amount of your offer is paid off. The minimum length for offers is 24 months but can be longer depending on the facts and circumstances surrounding each case.
When the IRS denies your offer in compromise
According to tax law, you have the right to appeal most IRS decisions. You also have the right to a hearing before an independent administrative law judge. And so, if you disagree with the outcome of your offer in compromise, you can file a formal written protest with the Office of Appeals in Texas.
Offers in compromise aren’t for everyone, and they’re certainly not easy to obtain. But if you owe back taxes and can’t afford to pay them, it’s worth looking into as a potential resolution.