An offer in compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.
Like any creditor, the IRS prefers a partial payment to no payment at all. The IRS’s goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost. Thus, in certain circumstances, the IRS is sometimes willing to settle a tax liability for less than the full amount. The IRS may accept an offer in compromise if any of the following circumstances exist:
One. Doubt as to Collectability.
If the IRS finds that it is unlikely you could ever pay the full amount of the tax you owe, even through monthly installment payments, within the remainder of the statutory period for collection, the IRS may consider an offer in compromise.
Two. Doubt as to Liability.
If the IRS finds that a legitimate doubt exists that the assessed tax liability is correct, the IRS may consider an offer in compromise. Possible reasons that may raise doubt as to liability include the examining IRS agent’s mistake in interpreting the law or the agent’s failure to consider your evidence.
Three. Economic Hardship or Unfair/Inequitable Circumstances.
If a taxpayer is able to demonstrate that the collection of the tax would create an economic hardship for the taxpayer, the IRS may consider an offer in compromise. Some examples may include where a taxpayer is out of work due to health problems or where the sale of assets to pay the tax would leave the taxpayer without enough money to meet basic living expenses. Additionally, if a compelling public policy or equity considerations exist, and due to the exceptional circumstances IRS’s collection of the full liability would undermine public confidence that the tax laws are being fairly and equitably administered, IRS may consider an offer in compromise. Exceptional circumstances for this purpose might include situations where a taxpayer relies on erroneous advice from the IRS.
A streamlined offer-in-compromise program is available for taxpayers with annual incomes up to $100,000 and a tax liability of less than $50,000.
Application and Payment Options.
The taxpayer starts the settlement process by making an offer in compromise on IRS Form 656. If the offer is grounded on any reason other than doubt as to liability, financial information must be submitted along with the offer. Also except where the offer is based only on doubt as to liability, the taxpayer must agree to comply with all tax laws relating to filing returns and paying taxes for five years or until the offered amount is paid in full, whichever period is longer. If these requirements are not met, the compromise terminates and the IRS can seek collection of the entire original liability amount.
There are two payment options available under the offer in compromise program:
One. Down Payment and Installments upon Acceptance of Offer.
A taxpayer may pay 20% of the offered amount when the offer is submitted, with the balance to be paid in five or fewer installments after the IRS accepts the taxpayer’s offer.
Two. Regular Payments While Offer is Considered.
A taxpayer may make partial installment payments to the IRS while the offer is being considered by the IRS, with the initial payment made at the time the offer is submitted.
If you would like to discuss whether submitting an offer in compromise is a viable option for you, please contact us.