U.S. expats, especially those living in low-tax jurisdictions, can face a significant IRS tax bill. Among those who owe tax, some simply don’t have the means to pay the liability.
In this blog, we review a lesser known IRS program called the “offer in compromise,” which affords those who cannot pay their full tax ability the opportunity to settle their tax debt for less than the full amount.
What is an Offer in Compromise?
An offer in compromise is an agreement between you and the IRS to pay a reduced amount to settle your tax liability. This soft approach allows the IRS to collect at least some of the tax that would otherwise would be logistically difficult to procure.
The offer application requires you to describe your financial situation in detail as well as provide an offer amount. It is up to the IRS to approve your offer, but will often agree if you make an offer that accurately reflects your ability to pay. The IRS may also take into account outside factors, such as your filing and payment history and your personal or health circumstances.
What is an Acceptable Offer Amount?
The minimum amount you can offer in your application is calculated using a formula that takes into account your personal assets, business assets, and your expected monthly net income over 12 months if you choose the “lump sum payment” option or 24 months if you choose the “periodic payment” option.
The lump sum payment option requires 20% of your offer to be paid up front and the remaining 80% to paid in 5 or fewer payments within 5 or fewer months of the date your offer is accepted. The periodic payment option requires 20% of your offer to be paid up front and the remaining 80% to be paid in monthly payments within 6 to 24 months.
Basic Eligibility for an Offer in Compromise
To be eligible for the offer in compromise IRS program, you must file all required tax returns and make all required estimated payments for the current year. The IRS will automatically turn down your offer if these requirements have not been met.
If, after submitting your asset and income information in your offer application, the IRS determines that you can pay your tax debt in full, your offer will most likely be rejected.
If you or your business is currently in an open bankruptcy proceeding, you are not eligible to apply for the IRS program. Any resolution of your tax debts must be worked out through the mechanisms of the bankruptcy proceeding.
Other Considerations for the Offer in Compromise
It should be noted that the IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts you into the offer in compromise program.
For example, if the IRS accepts your offer in 2021 and you file your 2021 tax year Form 1040 on June 15, 2022 showing a refund, the IRS will apply your refund to your tax debt. However, the refund will not be considered as a payment toward your offer.
What this Means for U.S. Expats
For U.S. expats who are behind on their filings, the IRS offers several amnesty programs to catch up, including the popular Streamlined Procedures. For U.S. expats who can’t afford to pay their tax liability, there are options as well, including the offer in compromise IRS program.
Given that each taxpayer has unique circumstances, it’s important for delinquent taxpayers to consult with a tax professional to review the various IRS programs and options in order to determine the best solution.