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Making an offer compromise to resolve tax debt: the basics

What do you do when you realize that you can't pay your tax debt? 

Well, to take a line from Winston Churchill, "never despair." Churchill was not talking about tax debt in his last great speech to the House of Commons. But his terse two words of advice are valuable in many different settings -- and that includes owing a daunting amount of taxes.

Taxpayers in Texas and across the nation should not despair about tax debt because there are options for addressing it. In this post, let's look at one of those options, the offer in compromise (OIC).

An OIC is a way for a taxpayer to settle tax debt with the IRS for less than the full amount in cases where full payment is not a realistic option. Keep in mind, however, that the agency will look closely at your ability to pay before approving such an offer.

Indeed, the IRS will also look at other factors besides your ability to pay. In addition to your income and expenses, it will consider the equity you have in assets, such as housing equity.

The IRS now has an online tool that taxpayers can use to assess their eligibility for the OIC program. But it is still wise to get the advice of a tax attorney as well before making an offer.

As with most things that have to do with the IRS, there is an appropriate form involved in making an OIC. For individuals, this is Form 433-A. For businesses, it is Form 433-B.

In part two of this post next week, we will explore some considerations for taxpayers to keep in mind in preparing an OIC.

Source: IRS.gov, "Offer in Compromise"

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