Settling tax debt is never easy, and you often need somewhere to begin. Agencies explain how complicated the process is and recommend that you should not start without consulting a professional. Although, deciding between an agreement for installment or an offer in compromise is not as hard as it may seem. Taxpayers can usually decide what works best for them after learning the details of both processes. Each process has its own pros and cons.
One of the main reasons people choose Offer in Compromise as a settlement option is completing their tax liability. Once the offer is accepted by the Internal Revenue Service (IRS) and payment is made in full, the entire tax debt is paid. There is no hassle of keeping up with monthly installments.
If your tax debt is secured through the IRS with a lien on a property you own, the Offer in Compromise can clear that up. All you need to do is file a lien withdrawal. This may be a strong reason to pursue an Offer in Compromise. However, the importance of this reason varies from individual to individual, depending on their financial situation.
Even if your Offer in Compromise is rejected, you can still pursue an installment agreement. In case the IRS accepts your Offer in Compromise, you would have to pay less than your total debt, which might seem attractive to some people.
Rejection is the main reason why Offer in Compromise is not seen as a dependable option. Many times, the IRS rejects applications because of the financials of the applying individual. Several applications are turned down because many tax relief agencies send applications even if they know they have zero chance of being accepted.
Liquidation of Assets
The IRS might expect you to liquidate your assets to come close to the amount that you owe. They can also file a federal tax lien against your property while the status of your Offer in Compromise is still pending. If you already have liens, it might not be an issue. It also is not common but can be a possibility.
The benefits of Installment Agreements usually occur where the disadvantages of Offer in Compromise end. The first advantage of an Installment Agreement is, typically, not having to liquidate your assets. Additionally, the monthly installments in this plan can be extremely low. The total amount you end up paying can even be lower than what you currently owe, as debt that ages more than ten years become uncollectible. You can review the dates for the Collection Statute Expiration.
In the Partial Pay Installment Agreement, the IRS gets the right to review your financial situation every 24 months. Acquisition of new assets and boosts in income can lead to the IRS increasing your monthly payments.
The second disadvantage of the Partial Pay Installment Agreement is the presence of tax liens. The IRS will not lift liens as they do in the Offer in Compromise. Moreover, the existence of liens can affect your ability to obtain future loans.
The forms to file an Offer in Compromise and Partial Pay Installment Agreement are different; however, the required information is pretty much the same. The IRS will require full disclosure of income, assets, and expenses in each tax debt settlement method. However, there is only a one-time disclosure in the Offer in Compromise compared to the Partial Pay Installment Agreement, where disclosure is scheduled every two years.
ConclusionThe IRS prefers that people with tax debt apply for a Partial Pay Installment Agreement rather than an Offer in Compromise. This is so the IRS can collect more of the tax debt because they expect the person to be in a better financial situation in the future. The recommended route is to consult a professional bookkeeper or Certified Professional Accountant about your current financial status. Try to file for an Offer in Compromise if the professional recommends it. If you do not file an Offer in Compromise or rejected it, you can file for a Partial Pay Installment Agreement.
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