How to Prepare for an IRS Offer in Compromise Review

Orlando R. Dizon

·April 11, 2024

·9 min read

How to Prepare for an IRS Offer in Compromise Review — Image Source: unsplash

Understanding the Basics of an IRS Offer in Compromise

An IRS Offer is a potential solution for individuals or businesses struggling to meet their tax obligations. This program allows taxpayers to settle their tax debt for less than the full amount owed. It's important to understand that not everyone qualifies for this option, and it's not a decision to be taken lightly.

What is an IRS Offer?

The concept explained

An IRS Offer is essentially a compromise between the taxpayer and the Internal Revenue Service (IRS). It enables eligible taxpayers to negotiate a settlement amount that is less than the total tax debt. This can provide relief for individuals facing financial hardship or those with legitimate reasons for being unable to pay their full tax liability.

Who can apply?

Not everyone is eligible to apply for an IRS Offer. Generally, individuals, businesses, and self-employed individuals who are unable to pay their full tax liability or would experience significant economic hardship by doing so may qualify. However, it's crucial to carefully assess one's financial situation before considering this option.

Why a Compromise Review Matters

The role of the review in the process

A Compromise Review plays a pivotal role in determining whether an IRS Offer will be accepted. During this review, the IRS evaluates the taxpayer's financial information and assesses their ability to pay. It's a critical step in the process that directly impacts the outcome of the offer.

How it affects you

For taxpayers seeking relief through an IRS Offer, understanding the significance of the compromise review is essential. It directly influences whether their offer will be approved or rejected, making thorough preparation and accurate documentation crucial for success.

Steps to Get Prepared for Your IRS Offer in Compromise Review

When preparing for an IRS Offer in Compromise Review, it is crucial to take specific steps to ensure a thorough and accurate submission. This process involves assessing one's financial situation and understanding the criteria set forth by the IRS.

Assessing Your Financial Situation

Gathering Financial Information

Gathering all relevant financial information is the first step in preparing for an IRS Offer in Compromise. This includes documentation of income, assets, expenses, and liabilities. It's essential to compile this information meticulously to present a comprehensive overview of one's financial standing.

Understanding Your Ability to Pay

Assessing one's ability to pay involves a detailed analysis of current income, expenses, and assets. This evaluation helps determine the amount that can be feasibly offered as part of the compromise. It requires a realistic assessment of available resources and potential future earnings.

Knowing What the IRS Expects

IRS Criteria for Acceptance

The IRS has specific criteria that must be met for an Offer in Compromise to be accepted. These criteria include demonstrating an inability to pay the full tax liability within a reasonable time frame or proving that doing so would create significant economic hardship. Understanding these requirements is essential for crafting a compelling offer.

Common Reasons for Rejection

Understanding common reasons for rejection is equally important. Lack of documentation, incomplete forms, or failure to meet eligibility criteria are frequent causes of rejection. By familiarizing oneself with these potential pitfalls, individuals can take proactive measures to address them during their preparation.

By following these steps and understanding what is expected by the IRS, individuals can better position themselves for a successful IRS Offer in Compromise Review.

Key Documents Needed for Your Compromise Review

When preparing for a Compromise Review as part of an IRS Offer, it is crucial to gather and organize essential financial records and complete the necessary forms. These documents play a pivotal role in presenting a comprehensive overview of one's financial situation and crafting a compelling offer.

Financial Records Are Key

List of Essential Documents

Gathering the right financial records is essential for a successful Compromise Review. The following documents are typically required:

Income Documentation: This includes pay stubs, profit and loss statements for businesses, rental income records, and any other sources of income.
Asset Records: Documentation of all assets such as real estate holdings, vehicles, bank statements, investment accounts, and retirement savings.
Expense Records: Detailed records of monthly expenses including rent or mortgage payments, utilities, groceries, medical expenses, and other regular expenditures.
Tax Returns: Copies of previous tax returns for thorough review by the IRS.

Tips for Organizing Your Paperwork

Organizing these documents systematically can streamline the preparation process. Consider creating separate folders or digital files for each category of documentation to ensure easy access and retrieval when needed. Labeling each document clearly with its corresponding category can also facilitate efficient organization.

Completing the Necessary Forms

Form 656 and Its Importance

Form 656 is the official application form for an IRS Offer in Compromise. It requires detailed information about the taxpayer's financial status and serves as a formal request to settle tax debt for less than the full amount owed. Accurately completing this form is crucial to the success of the offer.

Other Forms You Might Need

In addition to Form 656, there are other forms that might be required based on individual circumstances. These may include:

Form 433-A (OIC): This form provides a comprehensive overview of the taxpayer's financial situation, including income, expenses, assets, and liabilities.
Form 433-B (OIC): Businesses seeking an offer in compromise must submit this form to provide detailed information about their financial standing.

By ensuring that all necessary forms are completed accurately and comprehensively, individuals can present a strong case during their Compromise Review.

After Submitting Your Offer: What to Expect

Once the IRS Offer has been submitted, it initiates a review process that determines the outcome of the taxpayer's request. Understanding the subsequent steps and potential outcomes is crucial for individuals who have prepared and submitted their offer for consideration.

The Review Process

Timeline and Steps

After submitting an IRS Offer, the review process typically unfolds over several months. The IRS assesses the submitted documentation, financial records, and forms to evaluate the taxpayer's eligibility and financial situation. This comprehensive assessment ensures that all relevant information is thoroughly reviewed before a decision is made.

Tracking this timeline can provide insight into when to expect a response from the IRS. While specific timelines can vary based on individual circumstances, staying informed about the general review process can help manage expectations during this period of anticipation.

How to Track Your Offer’s Status

Taxpayers can track the status of their offer using the IRS's online tools or by contacting the agency directly. The IRS provides online resources that allow individuals to monitor the progress of their offer, providing updates on its current stage in the review process. Additionally, reaching out to designated IRS contacts can offer further clarity on the status of an individual's submission.

Possible Outcomes

Acceptance: Next Steps

If an IRS Offer is accepted, taxpayers must adhere to specific guidelines outlined by the IRS. This typically involves fulfilling any agreed-upon payment terms promptly and maintaining compliance with future tax obligations. It's essential for individuals whose offers are accepted to carefully follow through with these commitments to successfully resolve their tax debt.

Rejection: Understanding Your Options

In cases where an IRS Offer is rejected, individuals have options for recourse. They may appeal the decision or explore alternative resolution methods offered by the IRS. Understanding why an offer was rejected can provide valuable insights into areas that may require further attention or clarification.

By comprehensively understanding what occurs after submitting an IRS Offer, individuals can navigate this phase with informed expectations and readiness for potential outcomes.

Final Thoughts

As individuals navigate the process of preparing for an IRS Offer in Compromise Review, staying informed and proactive is crucial to achieving a favorable outcome. Here are some final considerations to keep in mind as you progress through this journey.

Staying Prepared and Informed

Maintaining ongoing financial management is essential for individuals who have submitted an IRS Offer. This involves diligently tracking income, expenses, and financial obligations to ensure continued stability. Additionally, staying informed about changes in tax laws or regulations can provide valuable insights into managing one's tax responsibilities effectively.

In the event that assistance is needed, there are resources available to provide guidance and support. Seeking help from qualified tax professionals or financial advisors can offer valuable expertise in navigating complex financial matters. These professionals can provide personalized advice tailored to individual circumstances, offering peace of mind during challenging times.

Encouragement for the Journey Ahead

Amidst the complexities of resolving tax debt, it's important to draw inspiration from success stories of individuals who have overcome similar challenges. Learning from these experiences can instill confidence and determination as you progress through your own journey toward financial stability.

Furthermore, maintaining a positive outlook throughout this process is key. While it may present challenges, addressing tax obligations through an IRS Offer signifies a proactive approach toward finding a resolution. By focusing on the potential for a positive outcome and remaining committed to the necessary steps, individuals can approach this endeavor with optimism and resilience.

By embracing ongoing preparedness, seeking assistance when needed, drawing encouragement from others' successes, and maintaining a positive mindset, individuals can navigate the path toward an IRS Offer in Compromise Review with confidence and determination.

Contact your Tax Resolution Attorney
Secure your financial peace of mind today. For more information, please visit https://taxresolution.esq

Attorney Orlando R. Dizon | Tax Resolution, Esq | Houston Tax Resolution Attorneys