Comprehensive Tax & Legal Solutions

How does an offer in compromise work? 

On Behalf of | Jul 19, 2023 | Tax Law

When people are facing an outstanding tax bill, they sometimes worry that they simply have no way to pay it. It’s beyond their means, and they don’t expect that they’ll ever have the money to pay what is due. They want to look into other options. They don’t want this debt hanging over their head, but that doesn’t mean they can come up with all the money to pay it off and put the problem behind them.

In a situation like this, the IRS may consider using an offer in compromise. What is this and how does it work?

Paying less than you owe

An offer in compromise is an agreement that a person can pay a smaller total and have the rest of their tax debt forgiven. They do still have to make a payment to the IRS, but it’s not for the total amount of the balance. The IRS is willing to compromise and take a smaller sum if it is affordable.

The biggest thing that the IRS is looking for in a situation like this is whether or not it will ever be possible for the person to pay off the tax debt. In some situations, it’s clear that the debt is going to be unaffordable forever. The IRS never expects to get everything that is owed. There are also cases where the debt creates financial hardships for the person who owes the money. 

Either way, the government would rather take a percentage of what is owed than get nothing at all. So they use an offer in compromise as a way to collect on a portion of the tax debt and waive the rest.

There’s no guarantee that everyone with an outstanding balance will qualify for an offer in compromise. But it is one of the potential tools that you can use and it shows why you need to carefully look into all of your options.