An Offer in Compromise

Every year, the IRS audits taxpayers to check if they’ve met their financial obligations. If their calculations show that you have underpaid your taxes, they will require you to pay the difference, as well as possibly additional penalties and interest. However, you do have the opportunity to offer the IRS something called an “offer in compromise,” which if accepted, allows you to settle with the IRS for less than the amount initially demanded. Tax Form 656 is the official paperwork used to propose this offer to the IRS.

This form allows you to choose one of three reasons for submission:

  1. Doubt as to liability – You do not believe you owe the amount that the IRS is demanding. Whether you dispute part of the amount or the entire claim, you must provide a reason and documents supporting your case.
  2. Doubt as to collectability – You are unable to pay the amount the IRS is demanding. You are requesting that the IRS allow you to pay a reduced amount based on your current financial situation. The IRS will use Form 433-A, which outlines your assets and liabilities in detail, to determine whether or not you can pay the full amount, and if not, how much you can pay. It will also help them determine your schedule for payment.
  3. Effective tax administration – You recognize that you owe the IRS, but dispute that you should have to pay due to extraordinary circumstances which would make it unfair or inequitable, or it would cause a significant financial hardship. This is the rarest of the three reasons, and because it is so vague, it has a very low rate of approval.

The IRS has no obligation to accept your offer in compromise, and most of them are refused initially. In addition, an incorrectly filled out form can delay your case and cause even more debt as penalties and interest continue to grow. However, by working with an experienced tax attorney, you may be able to increase your chance of success, reduce the amount you have to pay, and expedite the process.

For more information on tax Form 656, the process for creating and submitting an offer in compromise, and your rights as a taxpayer, contact Steven Klitzner at Florida Tax Solvers today.

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