You’ve seen the ads where a salesman gives a pitch on how to settle tax debts for pennies on the dollar. What are they talking about? Are they for real… or too good to be true?
The answer is complicated. These companies are talking about an OIC or Offer in Compromise. This is where you submit an offer to the IRS, to pay off your tax debt for less than what you owe. The IRS does accept these offers, but they also reject quite a few. Here’s how an OIC works to settle tax debts.
First the IRS requires you to submit a form which asks about your monthly income and expenses. You must also give information on your bank account and credit card balances, the value of any investments such as IRA’s and life insurance policies, and any assets like vehicles and homes.
There is a certain calculation, but basically the IRS will not accept an offer for less than your assets minus what they allow for living expenses. If you have an account with money in it, they will expect you to cash it out to settle tax debts.
For the IRS to accept a low offer, you must prove you don’t have assets or income to settle tax debts in a reasonable amount of time, or that paying the debt would cause economic hardship.
At Kansas City Tax Mediation, we strongly suggest getting a consultation before proceeding with an OIC. There’s a lot of time filling out forms and application fees you won’t get back if rejected. Scam companies charge you large fees for an OIC, even if you aren’t eligible. The worst part is you went to them to settle tax debts, yet while they were doing nothing, your debt was actually growing and now you’re back where you started.