Unfortunately, chances are you may not qualify for an "offer in compromise (OIC)". The IRS's idea of what you can afford is not the same as what you think you can afford.
There are 3 basic circumstances where the OIC is "appropriate".
The following is from the IRS website (IRS.gov) for "Offer in Compromise".
The IRS may accept an offer in compromise based on three grounds:
1. Doubt as to Collectibility - Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.
Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer's monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
2. Doubt as to Liability - A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer's evidence or (3) the taxpayer has new evidence.
Example: The taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.
3. Effective Tax Administration - There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.
Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.
In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer's ability to pay and includes the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
End of website info.
In order to satisfy item 1 above, you should obtain a copy of booklet " 656-B" which is available for download on the IRS website "IRS.gov".
Please note (as more fully described in the booklet) that you can not make an OIC until the tax is assessed. This means that you will have to file your tax return and wait until you get a bill from the IRS before you can respond with an OIC.
You should also look into Form 2210 before you file your return to see if you qualify for an exception to the underpayment penalty for "Underpayment of Estimated Tax", as most likely you were required to make 1 or more estimated tax payments after the IRA withdrawal which caused the large balance due with your return.
This is a common problem, but the good news is that you paid off your credit cards & you don't have that burden to worry about. Now is the time to see where you stand with the IRS, before interest & additional penalties begin to accrue.
Sorry to be the bearer of "bad news", but unfortunately, I'm used to it.
If my answer was helpful, please hit "ACCEPT" & thanks for using our service.