A taxpayer in financial difficulties has a number of options to resolve his federal tax debts. Offer in compromise is an ideal solution for a person on the verge of financial break down. It is a proposal specially designed to settle a taxpayers tax debts for less than what he owes. It is an agreement between the Internal Revenue Service (IRS) and the taxpayer. However, the settlement of the tax debts is subject to government discretion. Not all taxpayers can avail this benefit. Less than half of the offers in compromise requests submitted are actually accepted by the Internal Revenue Service. In case the offer is rejected, the taxpayer can move the IRS Appeals Office.

In order to qualify for an offer in compromise, you have to meet certain prerequisites. You must prove that you are facing financial difficulties. Applying for an offer in compromise is a lengthy process, requiring lots of consideration. Application should be submitted in IRS form 656 with a fee. Tax payers below the poverty line are exempted from paying the application fee. In addition to form 656, the tax payer has to submit a collection information statement in form 433-A, containing the personal and income details of the taxpayer and his spouse. This information will be closely examined by the IRS at the time of considering an offer in compromise. A number of financial documents are required to support the offer in compromise request.

There are some downsides to an offer in compromise. The disclosures made to the IRS regarding financial status and assets may adversely affect the taxpayer later. Another disadvantage is that interest on the tax amount is likely to keep accruing during the lengthy negotiation process. Often, the tax payer has to pay more than the original tax amount if the negotiation for offer in compromise fails.