When faced with an overwhelming tax debt, an Offer in Compromise (OIC) can provide a potential solution. This strategy involves negotiating a settlement with the IRS for less than the full amount owed. To apply, you’ll need to submit Form 656, along with Form 433-A if you’re employed or self-employed.
Key Points to Remember with 433-A
Before attempting your application, you should gather all the information needed to complete the Form 433-A. This move ensures that your application is complete and that the IRS will not reject it. Information needed for the form includes:
- Form 433-A: This form calculates your minimum offer based on your financial situation. The IRS generally won’t accept offers below this amount unless you can demonstrate exceptional circumstances.
- Required Information: Gather essential details like income, expenses, assets, and debts to ensure a complete application.
- Household Expenses: The IRS excludes certain expenses from calculations, such as private school tuition, college costs, charitable donations, and credit card payments.
Completing Form 433-A:
- Section 1: Provide personal information like marital status, homeownership, and dependents.
- Section 2: If self-employed, disclose business details like income, deposits, and structure.
- Section 3: List personal assets such as bank accounts, investments, and real estate.
- Section 4: If applicable, report business assets like accounts and notes receivable.
- Section 5: Provide business income and expenses, potentially using a profit and loss statement.
- Section 6: Report household income and expenses, including wages, Social Security, and living costs.
Calculating Your Offer:
Form 433-A calculates your minimum offer based on your financial situation and the payment timeline you choose.
- Payment within 5 months: Minimum offer = [Household income – expenses] x 48 + Total assets
- Payment beyond 5 months: Minimum offer = [Household income – expenses] x 60 + Total assets
Additional Considerations:
- Bankruptcy: If you’re in bankruptcy, you may not be eligible for an OIC.
- Trusts and Estates: Disclose any beneficial interests or life insurance policies.
- Asset Sales: Report any asset sales within the past 10 years.
Successfully navigating the OIC process requires careful preparation and understanding of the necessary forms and calculations. By providing accurate and complete information, you can increase your chances of reaching a favorable settlement with the IRS.
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