How to Reduce Your Federal Taxes

There is a softer side of the Internal Revenue Service, believe it or not. If you owe taxes way beyond your capacity to repay, the IRS will consider your request to reduce your liability if you file an Offer in Compromise (OIC). It requires that you make a lump sum or short term payment plan to pay off the IRS at a reduced dollar amount. The IRS accepts about 16 percent of the Offers in Compromise that they receive. The acceptance of your OIC will be based on the IRS’s assessment of its ability to recover all of the taxes that you owe. However, if this is the route you might like to take, here’s what you’ll need to do.

Instructions

Difficulty: Challenging

1. Fill out an OIC form, #656, along with Form 433-A, which will ask you to calculate how you intend to pay the IRS the reduced amount that you have offered.
2. Agree to do certain things to keep the IRS from revoking an approved OIC. They are: 1. Pay the amount you have offered in a timely fashion 2. File your next five years’ tax returns on time and pay your tax. If you anticipate a delay, make sure that you file for an extension. 3. Agree to let the IRS keep all tax refunds, payments and credits that you received prior to filing the OIC . 4. Allow the IRS to keep the tax refunds you may receive during the year in which you filed the OIC. If you fail to keep up your end of the agreement, expect the IRS to revoke your OIC.
3. Be prepared to pay the IRS a fee of $150 for the processing of your OIC. If you live on limited income, the IRS may waive this fee. If you wish that to be considered, make the request by filing a Form 656-A.
4. Expect for the process of applying for and having your OIC handled by the IRS to take up to two years. That includes the amount of time you need to file the forms and documentation, IRS processing, and finalization of the OIC and your payment arrangements. Currently, it takes about 380 days from start to finish.

Tips & Warnings

• Since the IRS only approves about one of every six OICs, you simply may not qualify. Instead, you should think about establishing an Installment Agreement to pay your taxes. You should find a tax professional who will know your alternatives to paying off your debt to the IRS.