Most filers end up getting money back on their taxes each year. But what happens if you land in the opposite scenario? What if you owe money to the IRS, and that sum is so massive you can't fathom the idea of paying it off?
If you're staring down a serious tax bill, here's some good news: You might manage to get a portion of that debt forgiven. It's called an offer in compromise, and it's an option worth pursuing if you truly feel there's no way you can pay the tax bill you're facing.
The IRS might grant you some leeway
The IRS will work with filers who find themselves unduly burdened by taxes. It's a concept known as an offer in compromise, and it effectively entails you offering -- and potentially paying -- a portion of your outstanding tax bill, as opposed to the entire sum you're on the hook for.
Why would the IRS agree to such an arrangement? For one thing, the agency might accept a smaller amount if it doubts it can collect your tax debt in full. You'd need to prove that you're incapable of paying that full bill based on your income and assets, but if you make the case, the IRS will often settle for a smaller amount if it realizes it has little chance of getting the full sum it's owed.
Even if you can technically pay your tax bill in full, the IRS might agree to less if you can prove that fulfilling your initial obligation constitutes a major financial hardship. Finally, the IRS might cut you some slack on the tax debt front if there's a question as to whether the full amount you supposedly owe is actually correct.
How to pursue an offer in compromise
Asking for an offer in compromise means going through a pretty cumbersome process -- but a worthwhile one, if it gets you out of paying some of your tax bill. First, you'll need to make sure you're current on your tax returns, and you'll need at least one statement from the IRS documenting your existing tax debt.
Next, you'll need to fill out Form 656 -- Offer in Compromise. On that form, you'll include information about your financial circumstances as well as your debt. You'll also indicate whether you're looking to make a single lump sum payment to fulfill your tax debt, or whether you wish to make periodic payments within 24 months. You'll then need to fill out some additional forms where you disclose your assets, income, and expenses.
You'll also need to decide how much tax to offer to pay the IRS. This number shouldn't be arbitrary. Rather, it should represent the amount you're able to reasonably pay given your financial circumstances.
Will the IRS accept your offer? Well, it depends. Before you go through the process of asking for an offer in compromise, it helps to utilize the IRS's pre-qualifier tool, which will help you determine your likelihood of success. Another thing to keep in mind is that if you're planning to pursue an offer in compromise, it's wise to enlist the help of a tax professional to guide you through the process. He or she can help you submit the right paperwork and navigate the process to increase your chances of success. Furthermore, if your initial offer is rejected, he or she can help you resubmit an offer to see if the IRS bites, or help you appeal the agency's original decision.
Is an offer in compromise your ticket to a lower tax bill?
Let's be clear: You can't request an offer in compromise if a given tax season simply doesn't go your way and you owe a bit of money to the IRS. Offers in compromise are designed for taxpayers who truly can't pay their debt, or can't pay their debt without it causing extreme hardship. If you're a middle earner who ends up owing a few thousand dollars this year, you probably won't be let off the hook so easily. If that's the case, however, you can always apply for an IRS installment plan. Though the IRS generally isn't so quick to agree to offers in compromise, it will generally work with you if you need to pay your tax bill off over time.
The $16,728 Social Security bonus most retirees completely overlook If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.