The Internal Revenue Service will set up an offer in compromise with taxpayers that meet certain criteria in which the taxpayer will be able to settle their debt with the IRS for less than what is owed. The IRS will not accept an offer in compromise if they believe that the taxpayer’s tax liabilities can be paid in a lump sum or with a suggested payment plan. Another reason why the IRS will not accept and offer in compromise is when the amount offered is equal to or greater than the reasonable collection potential. The reason collection potential is the process by which the IRS measures the taxpayer’s ability to pay their debt. It also includes the value that can be accessed from items that the taxpayer owns including their car, their home, their bank accounts and other real property. The reasonable collection potential also includes an estimated value of future income minus the money needed for basic living expenses.
Read more on Offer of Compromise Appeals for rejection.
There are three types of offer in compromise that the IRS recognizes for taxpayers. A taxpayer must meet one of the following three types of offer in compromise for the IRS to accept their payment.
1.) Doubt as to Collectability - This means that there is doubt present that the taxpayer will ever be able to pay off the debt that they owe to the IRS within the statutory period that remains to collect the debt. For example, a taxpayer owes the IRS over $35,000 for unpaid tax liabilities. The taxpayer notifies the IRS that the debt is correct but his or her wages aren’t enough to pay off the debt while also putting money aside for living expenses. The taxpayer also doesn’t own any real property and does not have the ability to pay the liability in full at the present time. The taxpayer would qualify for an offer in compromise.
2.) Doubt as to Liability - This is when a doubt exists that the assessed tax liability is correct. This can happen when the examiner of the case made a mistake in interpreting the law, when the examiner failed to consider the taxpayer’s evidence, and the taxpayer has new evidence.
3.) Effective Tax Administration - This is when there is no doubt that the amount owed to the IRS is correct and the taxpayer has the money to pay off the debt but if they were to pay the debt they would be placed into an economic hardship. For example, the taxpayer is caring for their child that has a serious illness such as cancer or heart disease and the money will be needed for in-home care and other expenses.
When the IRS approves an offer in compromise the taxpayer must then choose the payment plan they will use to pay their debt.
The three payment plans to choose from are:
The IRS does charge a $150 application fee when filing for an offer in compromise and Form 656 must be filled out and filed with the IRS. If the IRS declines the taxpayer’s application for an offer in compromise then the $150 application fee will be returned. The first payment plan must be paid in five installments at the most. The second payment plan must be paid within 24 months of the IRS receiving this offer from a taxpayer and the third payment plan must be paid over the remaining statutory period for collecting the tax that is owed to the Internal Revenue Service.
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