What is an offer in compromise? Can it help with my tax bill?

An offer in compromise is, essentially, an offer to pay off a tax bill for a lower amount than is due. In exchange for receiving some payment, the Internal Revenue Service (IRS) forgives the remaining debt.

Why would the IRS accept an offer in compromise? Before accepting an offer, the agency would conduct an investigation. This investigation looks into whether or not the taxpayer could potentially pay more than he or she has offered, known as the taxpayer’s “reasonable collection potential.”

If the IRS determines the taxpayer has offered the maximum amount he or she could realistically pay, the agency will generally accept the offer. This way, the IRS will receive at least some portion of payment.

How do you put together an offer in compromise? Those who are considering an offer in compromise are wise to seek legal counsel. The process requires more than a simple offer. The taxpayer must first review his or her assets and liabilities to determine if they qualify for an offer. Next, the taxpayer needs to follow the IRS’ offer in compromise rules to determine the correct amount to offer.

A famous Hollywood actor provides an example of what not to do. Wesley Snipes recently presented the IRS with an offer in compromise. The offer translated to roughly 4 percent of his tax bill — offering $842,061 of the $23.5 million owed. After the agency investigated Mr. Snipe’s estate, they determined he did not include various assets when calculating an acceptable offer amount. This led the IRS to determine they could likely receive a greater payment from the actor than offered. Thus, his offer was rejected.   

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