If a taxpayer qualifies as a low income taxpayer, then the taxpayer is not required to submit a down payment with any proposed Offer in Compromise. The Internal Revenue Code defines a low income taxpayer as individual that makes 250% of the Government defined Poverty Guidelines. This is a difficult threshold for most taxpayers to overcome, but if a taxpayer can quality, then it could lead to a significant initial savings. In order to qualify for low income status, a taxpayer must submit Form 656-A, Income Certification for Offer in Compromise and Application Fee and Payment. This is the same form that needs to be completed for the IRS to waive the $150 application fee for an Offer in Compromise.

An Offer that is submitted without a completed Form 656-A and without the required down payment will not be accepted and will be returned to the taxpayer. The IRS will also reject and return any Offer where a taxpayer has claimed low income status, but is later deemed by the IRS to not qualify for low income status. Therefore, it is important for any taxpayer claiming low income status does a careful analysis to ensure that the requirements are met.

If you would like help with the Offer In Compromise process please fill out our free online evaluation.

The Tax Increase Prevention and Reconciliation Act of 2005 made significant changes to the IRS’s Offer in Compromise program. These new rules went into effect for all Offers in Compromise submitted after July 16, 2006. Perhaps the most significant change came with the requirement that all Offers must be submitted with a down payment. For a lump sum offer, a taxpayer must pay 20% of the Offer up front. For an Offer that will be paid in installments, a taxpayer must make the planned monthly payments required in the Offer until it is accepted by the IRS.

If the taxpayer makes the planned payments for at least 2 years without the Offer being returned, withdrawn, or rejected, then the Offer is deemed to be accepted by the IRS. This means that an Offer in Compromise can be submitted for less than what the IRS would deem acceptable. If the Offer is not responded to in a timely manner, then the taxpayer gets to pay the Offered amount and the IRS must accept it.

Taxpayers who fall into a low income bracket don’t have to pay the down payment regardless of whether the Offer is a lump sum or installment arrangement. These taxpayers are also exempt from paying the filing fee of $150.

People with tax problems can no longer take advantage of the famed super discharge that was previously available when filing a chapter 13 bankruptcy . The 2005 Changes to the Bankruptcy Code ensured that fewer debtors would be able to discharge their tax liabilities in bankruptcy. Prior to the changes, a debtor with tax liabilities could easily discharge most, if not all, of the taxes, interest, and penalties owed simply by filing a Chapter 13 bankruptcy case. This was primarily due to Congress’ desire to have more debtors file for a Chapter 13 rather than a Chapter 7.

Changes to the Bankruptcy Code have made the prospect of discharging taxes in a Chapter 13 bankruptcy substantially more onerous. The requirements for discharging taxes are now the same regardless of whether a debtor files a case under Chapter 7 or Chapter 13 of the Bankruptcy Code. This means that fewer remedies exist for a debtor with rid themselves of tax liabilities.

Although the ability to relieve tax debt through bankruptcy has largely been eroded, a debtor can still seek an Offer in Compromise. This is an agreement between the taxpayer and the IRS that allows a debtor to pay a reduced sum of their tax debt, including penalties and interest , in either a lump sum payment, or over an abbreviated period of time. An Offer in Compromise can often result in debtors paying 20% or less of their tax debt over to the IRS.

An alternative to Offer In Compromise for some taxpayers is filing bankruptcy. The Bankruptcy Code allows for the elimination of tax debt provided that certain qualifications have been met. The standards are the same regardless of whether you file a Chapter 7 or Chapter 13 bankruptcy, and they are as follows:

1. The tax owed must be from a return that was due at least three years prior to the current tax year
2. The tax return must have been filed two years prior to the bankruptcy
3. The tax must have been assessed for at least 240 days prior to filing
4. The tax return in question cannot have been filed fraudulently
5. The taxpayer must not have been determined guilty of a willful attempt to evade the tax owed

Any taxes that do not fall into all of the aforementioned categories are considered priority claims in bankruptcy

When negotiating an Offer In Compromise the IRS has several items that must be included:

1. All of the attachments requested in Form 433 Collection information statement are required. This means that the client will need to submit documents to verify most of the items in the Offer in Compromise.
2. You will be required to submit 3 months worth of bank statements.
3. You will be required to submit verification of the balance owned on any real estate and verification of the amount of the payments on the real estate.
4. You will be required to submit documentation showing the amount owned on vehicles and the amount of the monthly payment
5. If the client has had a previous bankruptcy, the Discharge form must be attached to the front of Form 433.
6. Note in detail any transfers of assets for less than their full value
7. Copy of the Clients most recent 1040 Income Tax Return
8. A bankruptcy analysis
9. Client’s narrative. This is a way to tell your side of the story.