Taxpayers who have a tax debt they cannot pay may have heard that they can settle their tax debt for less than the full amount owed. It’s called an Offer in Compromise.
Before applying for an Offer in Compromise, here are some things to know:
- In general, the IRS cannot accept a settlement offer if the taxpayer can afford to pay what they owe. Taxpayers should first explore other payment options. A payment plan is one possibility. Visit IRS.gov for information on Payment Plans – Installment Agreements.
- A taxpayer must file all required tax returns first before the IRS can consider a settlement offer. When applying for a settlement offer, taxpayers may need to make an initial payment. The IRS will apply submitted payments to reduce taxes owed.
- The IRS has an Offer in Compromise Pre-Qualifier tool on IRS.gov. Taxpayers can find out if they meet the basic qualifying requirements. The tool also provides an estimate of an acceptable offer amount. The IRS makes a final decision on whether to accept the offer based on the submitted application.
- Taxpayers wishing to file for an Offer in Compromise should visit IRS website’s Offer in Compromise page for more information. There taxpayers can find step-by-step instructions as well as the required forms. Taxpayers can download forms anytime at www.irs.gov/forms or call 800-TAX-FORM (800-829-3676) and ask for Form 656-B, Offer in Compromise booklet.
Taxpayers who give money or property to others may wonder about the federal gift tax and if it applies. Most gifts are not subject to the gift tax.
Here are seven tax tips about the gift tax and giving:
1. Nontaxable Gifts. The general rule is that any gift is potentially taxable. However, there are exceptions to this rule. The following are nontaxable gifts:
- Gifts that do not exceed the annual exclusion amount for the calendar year,
- Tuition or medical expenses a taxpayer pays directly to a medical or educational institution for another person,
- A taxpayer’s gifts to their spouse,
- Gifts to a political organization for its use, and
- Gifts to charities.
2. Annual Exclusion. For 2017, the annual exclusion amount is $14,000. Most gifts are not subject to the gift tax. For example, there is usually no tax if the taxpayer makes a gift to their spouse or to a charity. If a taxpayer makes a gift to another person, the gift tax usually does not apply until the value of the gift exceeds the annual exclusion amount for the year.
3. No Tax on Recipient. Generally, the person who receives the gift will not have to pay tax on it.
4. Gifts Not Deductible. Making a gift does not ordinarily affect the taxpayer’s situation. A taxpayer cannot deduct the value of gifts they make (other than deductible charitable contributions as subject to the tax code).
5. Forgiven Debt and Certain Loans. Taxpayers who forgive debt or make a loan interest-free or below the applicable market interest rate may be subject to the gift tax.
6. Gift-Splitting. A taxpayer and their spouse can give up to $28,000 to a third party without making that gift taxable. Taxpayers need to consider one-half of the gift as from them and one-half given by their spouse.
7. Filing Requirement. Taxpayers need to file Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, if any of the following apply:
- The taxpayer gave gifts to at least one person (other than their spouse) that amounts to more than the annual exclusion for the year.
- The taxpayer and their spouse are splitting a gift. This is true even if half of the split gift is less than the annual exclusion.
- If the taxpayer gave a person (other than their spouse) a gift of a future interest that the recipient can’t actually possess, enjoy, or from which that person will receive income later.
- A taxpayer gifting their spouse an interest in property that will terminate due to a future event.
For more information, see Publication 559, Survivors, Executors and Administrators. Taxpayers can view, download and print tax products on IRS.gov/forms anytime.