What is Tax Resolution? Part 2 of 4

What is an Offer in Compromise?

The Department of Treasury defines compromise as “an agreement between a taxpayer and the Government that settles a tax liability for payment of less than the total amount determined and assessed.” When assessing whether one qualifies for a compromise, the IRS will consider a taxpayer’s ability to pay, income, expenses, and asset equity. Furthermore, to qualify you must be current with all of your filing and payment requirements, and may not be in an open bankruptcy proceeding. This is what you hear about on the radio and on late night TV commercials.  “If you owe the IRS $10,000.00 or more. . .”.  However, it isn’t as simple as the commercials make it out to be.  Few taxpayers will qualify for an Offer in Compromise, and the IRS puts many strict limitations on whom can receive tax forgiveness.  Further, as the IRS takes anywhere between 4 months and a year to review these submissions, if you file a faulty Offer and are denied, you lose out on the money you paid whomever to file the offer, you pay more in interest in penalties as they accrue over time, and you have stalled your CSED date, which is the statue of limitations on your debt.  The companies that use this as their go to method without properly qualifying an individual or business are actually performing a disservice to the clients they purport to help.

Here are last year’s Offer in Compromise Stats:

The Offer in Compromise acceptance rate is 40.32 percent. The IRS Data Book for 2017 (released March 29, 2018) shows that  62,000 Offers were received with 25,000 being accepted. That puts the Offer in Compromise acceptance rate at 40.32 percent and the Offer in Compromise rejection rate was 59.68 percent. The Average Dollar amount of the Accepted Offers was $10,234.48.  Your specific facts and circumstances, as well as the ability to respond to the IRS and follow their instructions will decide whether or not you are able to receive an Offer in Compromise.

There are three different types of Offer in Compromise.

Doubt as to Collectibility Offer in Compromise

Doubt as to collectibility is the most common type of Offer in Compromise and exists in any case where the taxpayer’s assets and income are less than the full amount of the liability. 26 U.S.C.A. § 7122, I.R.C. § 7122. Based on your unique financial situation, the IRS will assess your “Reasonable Collection Potential” by taking into consideration your assets and income. For assets, the IRS will consider your equity in items including bank accounts, real estate, and business equipment. With regards to collectibility, the IRS will establish your gross income, and then subtract household necessities such as utilities and health costs.

The IRS then determines what it can expect to collect from you based on the Collection Financial Standard. If your assets and income are less than the full tax liability, the IRS may accept an Offer in Compromise and settle the balance for a lesser amount. Accordingly, this option is especially appealing to individuals who have minimal assets or earnings. More information regarding Doubt as Collectibility Offer in Compromise can be found in Form 656-B, Offer in Compromise Booklet located at IRS.gov.

Why would the IRS accept less than what is owed?  Because it actually costs them money to continuously monitor tax debts and income information for all of the taxpayers that owe back tax.  If you can prove that you are unable to pay the amount owed, then it is actually in both parties best interest to relieve you of the obligation.

Doubt as to Liability Offer in Compromise

Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. 26 U.S.C.A. § 7122, I.R.C. § 7122. Whether it be an error by you or the IRS, an Offer in Compromise can be submitted to correct the inaccuracy and reassess the amount that you owe. It is important to note that when liability has been established by a final court decision or judgment, a Doubt as to Liability Offer in Compromise is not an option.

When submitting an Offer in Compromise based on doubt as to liability, the taxpayer must submit Form 656-L which is available at IRS.gov. Depending on your situation and the type of tax, a different remedy other than an Offer in Compromise may be better suited to correct error. Such alternatives are available on Page 3 of Form 656-L. If you do proceed with a Doubt as to Liability Offer in Compromise, it is important to have sufficient documentation to support your claim of “doubt” with regards to the tax. 2 I.R.M. Abr. & Ann. § 4.18.2.2.

Exceptional Circumstances Offer in Compromise

The Exceptional Circumstances Offer in Compromise is seen as a fallback when you fail to qualify for the Doubt as Collectibility Offer in Compromise. An Exceptional Circumstances Offer in Compromise is appropriate when you are capable of paying the outstanding tax debt, but to do so would cause you extreme economic hardship.

When submitting an Exceptional Circumstances Offer in Compromise, you may claim that either the collection of the tax is against public policy or would result in economic hardship, or you must provide a narrative explaining why paying the full amount would result in undue financial hardship.

For public policy offers, it must be shown that “collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner.” 26 C.F.R. § 301.7122-1.

In contrast, to show economic hardship a taxpayer must prove that “satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses.” 26 C.F.R. § 301.6343-1. Some factors that support, but are not conclusory, of economic hardship include: 1) the care of dependents; 2) the inability to borrow against assets; and 3) health ailments that will foreseeably result in the depletion of funds. 26 C.F.R. § 301.7122–1, Treas. Reg. § 301.7122–1.

In either situation, it is required that the taxpayer proposing compromise “demonstrate circumstances that justify compromise even though a similarly situated taxpayer may have paid his liability in full.” 26 C.F.R. § 301.7122-1.  Thus, you must convince the IRS that accepting your offer will prove more beneficial than collecting the full unpaid balance.

Conclusion

An accepted Offer in Compromise can change a person’s life.  Once the liens are lifted and the IRS backs away from the threat of collection actions, taxpayers can start to put their financial lives back together and can do away with the stress of the nagging debt that has been following them.  However, its important to remember that not all will qualify and that filing a fraudulent offer or an offer for an individual or business that does not qualify will actually put that taxpayer in a worse position than having filed nothing.  Head over to our Homepage or Contact Page to schedule a free consultation where we can discuss whether or not an Offer in Compromise is the right fit for you.

Entries in this series:

Part 1:  Introduction

Part 2:  The laws and options regarding the Offer in Compromise program

Part 3:  The laws and options regarding Installment Agreements

Part 4:  The laws and options regarding Penalty Abatement

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