DEFINITION of 'Offer In Compromise'

A program offered by the IRS to taxpayers who are unable to pay their tax debt. Those who qualify are allowed to make an offer in compromise, which is an offer to pay a lesser amount than that which is owed. The offer in compromise program is intended to allow taxpayers with substantial back taxes to settle their tax debt and start over with a clean slate, so that they can remain current on their taxes in the future.

BREAKING DOWN 'Offer In Compromise'

Taxpayers can find out whether they are eligible for an offer in compromise by consulting the checklist on Form 656 of the offer in compromise IRS package. In order to qualify, taxpayers must fall into at least one of the following three categories:

1) Uncertain Liability - Is tax really owed?
2) Uncertain Collectability - Taxpayer has no way to pay this debt.
3) Economic Hardship - Taxpayer must prove that paying the debt would be unfair or create further hardship.

According to the IRS, taxpayers should beware of promoter's claims that tax debts can be settled for "pennies on the dollar."

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