Kentucky Offer in Compromise Guide: A Complete Path to Tax Relief

If you have trouble paying your taxes in Kentucky, you're not the only one. Thousands of taxpayers in the state are getting deeper into tax debt because they missed filing their taxes, didn't pay their bills, or had an unexpected financial problem. Ignoring the problem can lead to serious issues, like having your wages taken away, penalties that keep going up, and interest that makes the total amount owed grow over time.

It's good that Kentucky and the IRS have organized programs that let you pay off your tax debt for less than the full amount. The Offer in Settlement program in Kentucky and the Offer in Compromise (OIC) program from the federal government are options for people who can't pay their full tax bill because they don't have enough money, have medical bills, or have other financial issues. These programs look at your money situation and may agree to a settlement based on how much you can reasonably collect, not how much you owe.

This guide covers everything you need to know about these options, including who can use them, what paperwork is required, and how to apply. Learning to settle your tax debt through an approved offer can help you move on, whether you owe money to the federal government or the state.

What Is Kentucky’s Offer in the Settlement Program?

The Kentucky Department of Revenue runs the Offer in Settlement (OIS) program, a legal way to get tax relief. It lets some taxpayers pay off their tax debt for less than the full amount owed when paying in full would be hard on their finances. The program is for people or businesses that can't pay all of their taxes because they don't have enough money, assets, or other qualifying factors. Kentucky's OIS program differs from the IRS Offer in Compromise because it only works for state tax debt and has its own rules and restrictions. 

The Division of Collections can run the program because of Kentucky Revised Statutes 131.030(3). This law sometimes allows the department to take less than the full tax bill. As long as taxpayers meet all the requirements, the program will enable them to pay off their back taxes and avoid having their wages or property seized.

Key Features of the Kentucky Offer in Settlement Program

• Minimum debt threshold:
  Your case must involve more than $3,000 in tax liability for the department to consider your offer.
  
  
• Non-refundable deposit:
  Your application requires a $500 deposit, which will be applied to your outstanding tax balance if the settlement is accepted.
  
  
• Eligibility limited to closed businesses:
  The Department will not accept offers from operating businesses. Only individuals and closed business entities may apply.
  
  
• Financial hardship requirement:
  Applicants must demonstrate, supported by complete disclosures, that paying the full amount owed would create a significant financial burden.
  
  
• Five-year compliance obligation:
  If your offer is accepted, you must fully comply with Kentucky tax laws for five years, including filing all required tax returns and making payments.
  
  
• No appeals process:
  If your offer is denied, you may not formally appeal the decision. However, you can reapply with a revised offer if your circumstances change.
  
  

This program can provide meaningful tax debt relief but is not a quick fix. You must be prepared to submit detailed documentation, comply with strict eligibility rules, and offer a payment that reflects your ability to pay. When used correctly, it can be a powerful tool to settle tax debt and restore financial stability.

How Kentucky’s Offer in Settlement Differs from the IRS Offer in Compromise

Understanding the difference between Kentucky’s Offer in Settlement and the IRS Offer in Compromise (OIC) is essential if you owe state and federal tax debts. While both programs aim to help taxpayers settle their tax debt for less than the full amount owed, they operate under different rules, eligibility criteria, and administrative processes.

Comparison Overview

Kentucky Offer in Settlement

• Minimum Debt: $3,000
  
  
• Application Fee: $500 deposit (non-refundable)
  
  
• Open Businesses Eligible?: No
  
  
• Appeals Allowed?: No formal appeals
  
  
• Review Timeline: Generally shorter
  
  
• Payment Terms: 30–90 days typical

IRS Offer in Compromise

• Minimum Debt: No minimum required
  
  
• Application Fee: $205 fee (waivable for low-income applicants)
  
  
• Open Businesses Eligible?: Yes
  
  
• Appeals Allowed?: Yes, 30-day appeal window
  
  
• Review Timeline: Typically 6 to 24 months
  
  
• Payment Terms: Lump sum or periodic payments
  
  

Key Differences to Consider

• Jurisdiction: Kentucky’s program applies only to state tax liability, while the IRS OIC is for federal tax debts.
  
  
• Eligibility: Kentucky does not accept offers from operating businesses, while the IRS does.
  
  
• Flexibility: The IRS allows for installment agreements and low-income waivers. Kentucky requires a flat deposit and has stricter documentation standards.
  
  
• Enforcement: The IRS may suspend collection activities during review. Kentucky typically does not.
  
  

If you owe both state and federal taxes, you must apply to each program separately. Strategic timing and consistency in your financial disclosures are critical to improving your chances of approval in both programs.

Eligibility Criteria for Kentucky Tax Relief

Before you apply to settle your tax debt through Kentucky’s Offer in Settlement program, you must meet all eligibility requirements set by the Kentucky Department of Revenue. These requirements ensure that only taxpayers facing genuine financial hardship can qualify for this form of relief.

To qualify for Kentucky's Offer in Settlement, you must:

• Owe at least $3,000 in tax liability to the Commonwealth of Kentucky.
  
  
• Please include a non-refundable $500 application deposit with your offer.
  
  
• There is no ongoing bankruptcy case. The state will not consider offers from individuals currently in bankruptcy.
  
  
• Be current on all estimated tax payments.
  
  
• Have filed all required tax returns for prior years and related business entities.
  
  
• You don't have a running business. Offers are only accepted from individuals or closed business entities.
  
  

We will automatically reject your offer if you don't meet these conditions. You should confirm compliance with each requirement before preparing and submitting your application.

Step-by-Step: How to Apply for Kentucky’s Offer in Settlement

Applying to the Kentucky Offer in Settlement program requires accuracy, organization, and transparency. Below is a step-by-step breakdown to help you navigate the process.

Step 1: Gather Required Documentation

Prepare the following documents:

• Completed and signed Form 12A638(I) (Statement of Financial Condition for Individuals)
  
  
• Three months of bank statements for all household accounts
  
  
• Three months of pay stubs for all earners in the household
  
  
• Most recent state and federal tax returns with all attachments
  
  
• Statement of Financial Condition for Businesses (Form 12A639), if applicable
  
  
• Business tax returns and financial statements, if self-employed
  
  
• Recent credit report
  
  
• Power of attorney form (if someone is applying on your behalf)
  
  
• Documentation for any inheritances or legal settlements within the last year
  
  

Step 2: Complete Form 12A018

This is the official Offer in Settlement application. Be prepared to:

• Enter personal and business identification details
  
  
• Specify the total offer amount (minimum $500)
  
  
• Choose a payment term (30, 60, or 90 days)
  
  
• Please describe your financial circumstances and any hardships you are experiencing.
  
  
• List the tax periods and types being settled.
  
  

Step 3: Calculate and Fund Your Offer

Your offer should reflect what the department could reasonably expect to collect from you based on:

• Your net asset equity
  
  
• Your projected future income
  
  
• Living expenses (only reasonable and necessary costs are considered)
  
  

Do not include previously made payments, refunds owed, or unrealistic contributions.

Step 4: Submit the Application Package

Please send your complete package, including Form 12A018, supporting documents, and the $500 deposit, to:

Division of Collections
Offer in Settlement Section,
P.O. Box 5222
Frankfort, KY 40602
Fax: (502) 564-7348
Phone: (502) 564-4921

Once received, the department will review your submission and notify you by mail regarding its decision. If accepted, you must meet all compliance obligations going forward. If rejected, you may reapply or explore alternative options for tax debt relief, such as an installment agreement or professional negotiation through a tax relief company.

Common Mistakes and How to Avoid Rejection

Many taxpayers fail to qualify for Kentucky's Offer in Settlement program due to avoidable mistakes. Understanding these common errors can improve your chances of acceptance and help you prepare a complete and credible application.

1. Incomplete Financial Disclosure

Applicants often submit offers without comprehensively documenting their income, assets, and liabilities. Missing or inconsistent records will almost always lead to rejection.

How to avoid this: Ensure your application includes all required documentation and reflects your financial situation, including bank accounts, credit reports, income sources, and household expenses.

2. Offering Too Little

Your offer will be denied if your proposed settlement amount is significantly lower than what the department believes it can reasonably collect.

To avoid this: Base your offer on realistic calculations using your income, asset equity, and allowable living expenses. Avoid making symbolic or arbitrary offers.

3. Failing to Meet Eligibility Requirements

Applying without meeting basic criteria, such as filing all tax returns or being out of bankruptcy, leads to automatic disqualification.

How to avoid this: Please review the complete eligibility list before submitting your application. Please ensure your tax returns are current and meet the threshold requirements.

Understanding the IRS Offer in Compromise Program

For federal tax debts, the IRS Offer in Compromise provides a path to reduce what you owe if you cannot pay your full tax liability. This program evaluates your financial situation and offers to settle your tax debt based on your reasonable collection potential.

Who Qualifies for an IRS Offer in Compromise

To be eligible, you must:

• Have filed all required tax returns
• Be current on estimated payments and federal tax deposits (if applicable)
• Not to be in an open bankruptcy proceeding

The IRS uses a formula based on income, asset equity, and necessary living expenses to determine whether to accept an offer.

IRS Payment Options

• Lump Sum Option: If accepted, submit 20% of your offer upfront and pay the remainder in five or fewer payments.
• Periodic Payment Option: Submit the first payment with your application and continue making monthly payments while your offer is reviewed.

If the IRS accepts your offer, all remaining payments must be made according to the agreed schedule.

Low-Income Certification

Taxpayers who qualify under IRS low-income guidelines are not required to pay the application fee or make initial payments during the offer review. This provides additional relief for those experiencing the most significant economic hardship.

Coordinating State and Federal Tax Relief Efforts

You must apply for relief through two programs if you owe Kentucky and IRS tax debt. However, the outcome of one application may influence your strategy with the other.

Key Considerations

• Financial disclosures made to one agency may impact the other. Always provide consistent information.
• Apply when your financial situation demonstrates hardship to both agencies.
• Consider timing both applications together to show a genuine need and avoid conflicting records.
• Hiring a tax relief company or independent organization may improve your chances if your situation is complex.

Taking a coordinated approach to settle your tax debt on both the state and federal levels can increase your chances of approval and help you resolve your obligations more efficiently.

Final Checklist Before You Apply

Before you submit your application for Kentucky's Offer in Settlement or the IRS Offer in Compromise, you must ensure that you have completed all required documentation and eligibility steps. A complete and accurate submission significantly increases your chances of acceptance and helps avoid unnecessary delays.

Kentucky Offer in Settlement Checklist

• All required tax returns have been filed.
  
  
• Tax liability exceeds $3,000
  
  
• No open bankruptcy proceeding
  
  
• Estimated tax payments are current.
  
  
• Business operations have ceased (if applicable)
  
  
• Form 12A018 is completed, signed, and dated.
  
  
• Form 12A638(I) or 12A639 completed (depending on employment status)
  
  
• Three months of bank statements for all accounts
  
  
• Three months of pay stubs for all household earners
  
  
• Most recent state and federal tax returns with all schedules
  
  
• Business tax returns and financial statements (if self-employed)
  
  
• A recent credit report included
  
  
• Power of attorney included (if someone is representing you)
  
  
• Documentation for any recent inheritances or legal settlements
  
  
• A non-refundable $500 application deposit is included.
  
  

IRS Offer in Compromise Checklist

• All required tax returns have been filed.
  
  
• Estimated tax payments and federal tax deposits are current.
  
  
• No open bankruptcy proceeding
  
  
• Valid extension filed for current year return (if applicable)
  
  
• Forms 433-A (OIC) or 433-B (OIC) completed
  
  
• Form 656-B completed accurately.
  
  
• $205 application fee included (unless low-income waiver applies)
  
  
• Initial payment submitted per selected payment plan
  
  
• Supporting documentation for financial hardship and income
  
  

Double-checking this list before submission will help avoid common rejection reasons such as missing forms, incomplete disclosures, or ineligibility. If you are unsure about any portion of the application, consider consulting a tax relief company or an independent organization for additional information and support.

Once your application is ready, submit it by mail to the appropriate agency and retain copies for your records. Accurate preparation can distinguish between continued debt and a manageable settlement that resolves your tax obligations.

FAQs – Kentucky Offer in Compromise & Tax Debt Relief

Can I use IRS Offer in Compromise forms to apply for Kentucky tax relief?

The Kentucky Offer in Settlement program requires forms and a process. You must submit Form 12A018 and the necessary documentation to the Kentucky Department of Revenue. IRS Offer in Compromise forms apply only to federal tax debts. To settle your tax debt at the state level, follow Kentucky’s procedures and ensure your application complies with all state tax laws.

Does submitting a Kentucky offer stop collection efforts like wage garnishment?

Submitting an offer in compromise to the state does not automatically stop collections such as wage garnishment. Unlike the Internal Revenue Service, the Kentucky Department of Revenue generally continues collection activity during review. It's important to realize that the offer process might not stop active enforcement if your financial situation involves it.

How does the IRS decide whether to accept an offer in compromise?

The IRS evaluates an offer based on your reasonable collection potential. This includes a detailed analysis of your income, assets, liabilities, and allowable living expenses. If the IRS determines that you cannot pay your full tax liability and your offer represents the most it could expect to collect, it may accept it. Proper documentation is essential for approval.

What if I have both state and federal tax debt?

You must apply separately to the IRS and the Kentucky Department of Revenue. Each agency has its own eligibility criteria, forms, and approval process. To settle tax debt effectively, align your documentation and ensure consistent financial disclosures. A tax relief company or independent organization can assist with dual filings when your tax liability spans both jurisdictions.

Can I apply if I am in an open bankruptcy proceeding?

No, if you are in an open bankruptcy proceeding, you cannot apply for either the IRS Offer in Compromise or Kentucky’s Offer in Settlement. Your bankruptcy status prevents you from receiving most tax debt relief until the case is resolved. You can submit your offer with the necessary paperwork and supporting documentation after it has closed.

What is the role of the Taxpayer Advocate Service in this process?

The Taxpayer Advocate Service is an independent organization within the IRS that helps taxpayers facing economic hardship or unresolved IRS issues. Although it doesn't process offers directly, it can assist you in navigating delays, obtaining additional information, and safeguarding your rights. It is beneficial for complicated or prolonged offer cases.

What happens after my offer is accepted?

If your offer is accepted, you must comply with all tax laws for at least five years, including timely filing and complete payment of taxes owed. Failure to remain in compliance may void the settlement. Your agreed-upon payment plan, or lump sum, must be fulfilled as outlined. The IRS or Kentucky Department of Revenue will confirm your acceptance terms by mail.

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