Do you owe the IRS back taxes that you cannot afford to fully repay? There is one way you can pay off the entire debt by paying only a portion of what you owe. It is called making an offer in compromise (OIC) to the IRS. Under this program, if the amount you offer is accepted by the IRS, your entire tax liability is cancelled once you pay this amount.
Needless to say there are very strict requirements to meet for the IRS to accept your offer in compromise. To evaluate if you qualify to make an OIC, the IRS would look at your total equity in assets that can be seized for payment, as well as the present amount they believe you can pay each month toward your outstanding debt. Under the new tax rules, the IRS will still calculate your total asset equity that can be seized, but the present amount you must pay has been greatly reduced. In the past, the monthly amount to pay was multiplied by 48 but now it is multiplied by 12.
For example, if you earn $5,000 per month and your disposable income is $2,000, then the amount you have to pay in OIC (plus equity in assets) would be 2,000 x 12 which works out to be $24,000. Under the old rules, it would have been 2,000 x 48 i.e. $96,000. Obviously, it would be a lot easier to come up with $24,000 than $96,000 to settle your taxes. If you are self-employed without a fixed monthly income, the IRS will take the average of your last 6 months’ income and expenses to derive your disposable income.
But although this sounds good, there are some provisos that apply. Your OIC would only be considered if you have not transferred any of your properties to another party, and if accepting your OIC would not be against public interests. In addition, your OIC is unlikely to be considered if you have other assets that can be seized to pay your debt. This includes IRAs and home equity.
Once your offer is accepted, you are given a maximum of 5 monthly installments to pay off the OIC amount. If you need more time, the OIC amount will be increased. You will have to multiply the amount you have to pay by 24 instead of 12, and pay the OIC amount over 24 months.
To make an application for an OIC, you have to pay a $150 nonrefundable application fee and include 20% of the amount you are proposing to settle with upfront. If your OIC is not approved, the amount paid would be applied to your outstanding tax debt.