An Offer in Compromise is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed. For many taxpayers seeking relief from an overwhelming past tax bill, the most common solution they will hear about is an Offer in Compromise. Some tax relief companies, especially those advertising on the radio and TV, will push an Offer in Compromise as if it were this easy, guaranteed solution.
So if you’ve gotten just this far, you may be surprised to learn that not every Offer in Compromise application is accepted!
The two biggest reasons the IRS turns down an Offer In Compromise:
- Making too much money
- Having too much equity in assets
Making too much money
In this scenario, the IRS determines you can pay your tax debt off based on how much “available income” you have at the end of the month.
It’s not all based on your actual expenses. The IRS has “collection financial standards” that apply and some people spend more than those amounts.
Example: $100K income, single but nothing left over, and debt is $40K
Having too much equity in assets
The equity in your assets, even if valued at 80%, could pay off your tax debt if the assets were sold. There are some ways to get around this, but as a general rule, it’s how the IRS calculates Offers.
People with assets that are substantial but are broke month to month are good candidates for Currently Not Collectible status, which is different from an Offer in Compromise.
Example: Debt of $100K, 401K valued at $200K
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