IRS Settlement Agreement
If you fail to pay your taxes on time, the IRS can assess interest and penalties and place a lien against all of your property. Under certain circumstances, however, it is possible to settle with the IRS for less than the amount due through the offer in compromise (OIC ) program. Even if the IRS will not make an OIC, it might agree to accept payment in installments.
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Legitimacy
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The IRS might make an OIC if it has serious doubt about the legitimacy of your tax debt -- for instance, if an IRS employee made an error in interpreting tax law, if the IRS failed to consider evidence you provided before you were declared delinquent or if you provide new evidence that proves you have no genuine liability for your delinquent tax debt. An example would be if you presented your passport to the IRS to prove that you resided abroad during the tax year and therefore qualify for the foreign earned income exclusion, the IRS might make an OIC rather than wait for you to take it to court.
Inability to Pay
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The IRS will consider making an OIC if, after careful examination of your finances, it concludes that you will never be able to pay the delinquent tax debt even if it institutes aggressive collection action. An OIC will be particularly persuasive to the IRS if much of the property that it would otherwise liquidate to satisfy your tax debt is business property with which you use to earn income to pay your taxes.
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Unfair Hardship
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The IRS might make an OIC if you can establish that paying your full tax debt would result in unfair hardship to you or another person. Criteria for an unfair hardship is difficult to meet. A hardship OIC might be offered if, say, you have a terminally ill child, and paying your tax debt would impoverish you to the extent that you would be unable to afford quality medical care for your child.
Alternative: Installment Payments
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If the IRS refuses to make an OIC, it might accept your offer to pay your tax debt in installments. This will not prevent penalties and interest from accumulating, but it will prevent the IRS from placing a lien on your property or liquidating your assets, as long as you keep up with your payment obligations.
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References
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