Settling tax debt is never easy; you often need somewhere to begin. Agencies explain the complicated process and recommend that you start with consulting a professional. However, deciding between an agreement for installment or an offer in compromise is easier than it may seem. After learning the details of both processes, taxpayers can usually determine what works best for them. Each process has its pros and cons.
Offer in Compromise
Advantages
One of the main reasons people choose an Offer in Compromise as a settlement option is because of completing their tax liability. The entire tax debt is paid once the offer is accepted by the Internal Revenue Service (IRS) and payment is made in full. 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. It may be a strong reason to pursue an Offer of 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. If the IRS accepts your Offer in Compromise, you would have to pay less than your total debt, which might seem attractive to some people.
Disadvantages
Rejection is why an Offer in Compromise is not seen as a dependable option. The IRS often 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 you owe. They can also file a federal tax lien against your property while your Offer in Compromise status is still pending. If you already have liens, it might not be an issue. It also is not common but can be a possibility.
Installment Agreement
Advantages
The benefits of installment agreements usually occur where the disadvantages of offer-in-compromise end. The first advantage of an Installment Agreement is not having to liquidate your assets. Additionally, the monthly installments in this plan can be extremely low. The total amount you pay can even be lower than what you currently owe, as debt that ages more than ten years becomes uncollectible. You can review the dates for the Collection Statute Expiration.
Another advantage of an Installment Agreement is the acceptance rate. It is much easier to get a Partial Pay Installment Agreement accepted than it is to get an accepted Offer in Compromise.
Disadvantages
The IRS can review your financial situation every 24 months in the Partial Pay Installment Agreement. 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 in the Offer in Compromise. Moreover, the existence of liens can affect your ability to obtain future loans.
Filing Process
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.
Conclusion
The IRS prefers that people with tax debt apply for a Partial Pay Installment Agreement rather than an Offer in Compromise. It is so the IRS can collect more tax debt because they expect the person to have a better financial situation. The recommended route is to consult a professional bookkeeper or Certified Professional Accountant about your 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 reject it, you can file for a Partial Pay Installment Agreement.
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