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What is an offer in compromise?

You owe money to the Internal Revenue Services (IRS). You have no idea how you're going to pay it back. Then you hear that the IRS sometimes accepts an "offer in compromise." What is this and how can it help?

As the name implies, it means that you offer to pay a portion of what you owe. If the IRS agrees, they'll accept that smaller payment and the rest of your tax debt will be wiped out.

For example, perhaps you owe them $40,000. You don't have that, but you do have $10,000. They may take the $10,000, allowing you to eliminate the debt for only a quarter of what you actually owed.

This doesn't work for everyone. There are numerous factors that the IRS considers, and each case is looked at individually. Things they consider include your income levels, your ability to pay off the full debt, all of the expenses that you have and how much your assets are worth. They also consider whether or not the full debt can be looked at as a financial hardship based on your circumstances.

Often, the IRS admits that this just means they don't think they'll collect the full amount. You may not have many assets, your income levels are low and all that you earn goes toward necessary expenses like food and lodging. They know they're not going to see that $40,000 no matter what, so they'll take what they can get and allow you to move on with your life.

Again, they don't approve everyone for this process, so don't assume you can use it just because you'd like to. At the same time, you can see how important it is to know all of your legal options when you're facing tax debt.

Source: IRS, "Offer in Compromise," accessed Aug. 17, 2017

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