Source of Funds
As a prerequisite to the acceptance of an offer in compromise, the taxpayer must indicate where the money will come from to pay off their compromised liability with the IRS. Additionally, the taxpayer must inform the IRS as to how the taxpayer plans to raise sufficient cash to pay for their Offer. For example, a taxpayer can state that they plan to sell of their house, that they will be drawing on credit cards, receiving gifts from family members, or that they intend to refinance their mortgage.
In Full Compliance
If the taxpayer has not filed all required tax returns, they will be asked to do so before the IRS will begin to evaluate their offer. This includes but is not limited to: All Income Tax, Employment Tax, and Excise Tax returns, along with all returns required to be filed by Partnerships, Limited Liability Companies, or closely held Sub-Chapter S Corporations that impact a taxpayer's personal tax returns.
Taxpayer must be current with estimated taxes and/or income tax withholding for the current year.
Business taxpayers attempting to compromise employment taxes must have timely filed and paid employment taxes for the preceding two quarters prior to filing the offer and must have timely paid all federal tax deposits due in the quarter in which the offer is submitted.
Taxpayer is not currently in a Bankruptcy Proceeding
The IRS has a policy of rejecting an offer in compromise submitted by a taxpayer who is currently in a bankruptcy proceeding. The IRS may proceed with an offer in compromise when the taxpayer is threatening to file for bankruptcy if the tax liability is dischargeable in bankruptcy and the amount of the offer equals or exceed the amount that the IRS reasonably expects to recover from the bankruptcy plus what can be collected from the taxpayer on non-discharged liabilities or from property outside the bankruptcy.
Taxpayer must pay a user fee
Taxpayer's must pay a nonrefundable $150 Offer in Compromise application fee, or request a fee waiver.
Taxpayer must submit the required forms
Taxpayer's must submit IRS Forms 656 or 656-L, 433-A, and/or 433-B, along with the required support documentation.
Taxpayer on occasion may be required to sign a Collateral Agreement
On rare occasions, the IRS may seek a collateral agreement that provides that the taxpayer will pay more if his income rises in the future.
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