An offer in compromise is an agreement between a taxpayer and the IRS that settles and resolves the taxpayer’s tax debt. The IRS has the authority to settle, or “compromise,” federal tax liabilities by accepting less than full payment under certain circumstances.
A tax debt can be legally compromised for one of the following reasons:
1. Doubt as to Liability – Doubt exists that the assessed tax is correct;
2. Doubt as to Collectibility – Doubt exists that you could ever pay the full amount of tax owed;
3. Effective Tax Administration – There is no doubt the tax is correct, and no doubt that the amount owed could be collected, but an exceptional circumstance exists. To be eligible for a compromise on this basis, the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable.
The 10 important facts about Offers in Compromise
- In order to qualify to file an OIC, you must have filed all of the tax returns you are required to file; however, you do not have to make payment on those filed returns. In the case of self-employed individuals, “compliance” means filing and full payment for two consecutive quarters.
- The settlement procedures depend on how much is collectible from you. It has nothing to do with how much you owe to the IRS.
- For collectibility, the IRS looks at both assets and income.
- In analyzing income, the IRS is required to allow you to offset your income with reasonable and necessary living expenses (e.g., housing, food, transportation, health care, court ordered payments, child care, etc.). The IRS has tables that show the allowable amounts for the area in which you live.
- The IRS will discount assets to their “quick sale” value. In the case of real estate, cars, and other fixed assets, the IRS discount is at least 20% in almost all cases.
- If you disagree with an IRS determination by an Offer Specialist, the offer can be appealed to an IRS Office of Appeals. The appeal conference is informal.
- If the IRS is actively pursuing a collection action against you (either a levy, lien or garnishment of wages), you can appeal that collection action in what is called a Collection Due Process Appeal. This must be filed within 30 days of the Notice of Intent to Levy. This will normally stop the activity. During that Appeal hearing, you can offer an Offer in Compromise or an Installment Agreement as an alternative to the collection action.
- All tax liabilities of individuals and corporations can be compromised, including payroll tax liabilities and tax liabilities for tax fraud, and any tax liability not dischargeable in bankruptcy.
- The Congress requires the IRS to have a “liberal acceptance” policy for offers in compromise. The legislative tax policy for offers-in-compromise is to give taxpayers a “fresh start.” The IRS adopts that tax policy.
- A tax liability can be settled, even if the IRS believes that your liability is collectible for the full amount of that tax liability if you can demonstrate “special circumstances” for those assets or income. This can be done if the settlement is important for “effective tax administration.”
If you or a client have tax issues and need IRS help, call Jeffrey R. Siegel, your Kansas City Tax Attorney at (913) 735-4829.