Advantages and Disadvantages Of Offers In Compromise
An offer in compromise is a popular tax resolution strategy. In essence, an offer in compromise entails settling tax debt for less than the amount owed and repaying the settled amount in one lump sum or short series of payments. While this tax resolution strategy is favored due to the concept of repaying less than the amount owed, there are disadvantages. Before finalizing your decision of making an Offer in Compromise, weigh the pros and cons of this method.
If you submit an offer in compromise (OIC), of course you will be able to save money if the offer is approved by the IRS. Forced collection strategies will also be suspended while the OIC is pending, including wage garnishment and bank account seizures.
If accepted, your credit rating will also get boosted because the IRS is obliged to submit a Certificate of Release of Federal Tax Lien.
On the other hand, the disadvantages of an offer in compromise include giving the IRS more time to collect since the statute of limitations will be extended while the OIC application is pending. If the IRS finds out you failed to disclose your assets and income in full, the offer will automatically be canceled because honesty in disclosure is significant in the OIC process.
You will also be letting go of your right to bring your case to court during the period that the OIC is covered, and this is regardless of whether your offer will be approved or rejected.
If you do not meet the requirements for Low-Income Certification, you would have to shell out the offer’s initial payment, including a nonrefundable application fee of $205.
Another disadvantage of an offer in compromise is the cost. Compared to the cost of an installment agreement, offers in compromise are expensive.
Now, if you have made up your mind and you really want to go through with making an offer, prepare to submit the following documents: income tax return for the last two years, deeds and mortgage records, titles to vehicles, personal and business bank statements, life insurance policies, unpaid bills or other documents that would prove your debts, medical reports and other proof of your living expenses.
Effective Tax Administration
In the previous discussion, the taxpayer was looking into filing an Offer In Compromise due to the financial challenges brought by the unprecedented events in 2020. The thing is, she has a lot of assets she can use to qualify under the IRS premises, but she’s capitalizing on these to provide for her monthly needs, thus selling said assets might result in economic hardship.
The situation above can call for effective tax administration, which is a special circumstance that can qualify the taxpayer for an offer in compromise. People with health problems like diabetes or HIV, advanced age, or those deemed physically and psychologically incapable can be considered by the IRS for an offer in compromise under the effective tax administration qualification. Of course, qualifying for an OIC on the grounds of effective tax administration is fact dependent and more likely if submitted by experienced tax counsel.
Just in case you fall under a similar situation or are undergoing a different circumstance that can be considered detrimental to your ability to pay tax debt, you need to make sure that you have enough documents to support your condition. For example, reports and records from medical professionals should be used for those with health problems.
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