If you have already spoken with an attorney and determined that bankruptcy will not discharge all of your tax debt, and an installment agreement is not a feasible way to satisfy your remaining tax debt, then you will want to try to make an Offer In Compromise to the IRS.
What Is an “Offer In Compromise”
An offer in compromise is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the amount owed. Like bankruptcy, it gives the eligible taxpayer a chance to satisfy their tax debt and get a “fresh start” with respect to the tax debt.
Why Would the IRS Accept Less than What Is Owed?
When a troubled taxpayer prioritizes between buying food, paying the mortgage or paying taxes – taxes often got the short shrift. Nonetheless, that tax debt continues and continues to grow.
Three tax consequences often accompany an economic downturn and rapid changes in asset ownership and/or income, and these consequences also form the bases for the IRS accepting an offer in compromise:
- Doubt as to collectability
- Doubt as to liability
- Effective tax administration
Doubt as to Collectability: If taxpayer’s assets and income are less than the full amount of the tax liability, then the IRS has doubt as to collect-ability, and is authorized to negotiate and accept an offer in.
Doubt as to Liability: Rapid economic change comes with chaos, and tracking income and tax liability across a shifting economic landscape is not easily accomplished. As a result, a genuine doubt as to tax liability can result. Here again, the IRS is authorized to investigate and accept an offer in compromise when there is doubt as to liability.
Effective Tax Administration: This last basis for accepting an offer in compromise takes more of a public policy perspective on the tax administration process, and determines whether the taxpayer would suffer “economic hardship” or whether accepting a compromise would promote effective tax administration where the taxpayer provides a “compelling public policy or equity consideration” to support such compromise.
“Economic hardship” is a legitimate basis for an offer in compromise where the taxpayer can show that although full collection of tax debt could be achieved, it would cause the taxpayer “economic hardship” as specified in the Treasury regulations.
“Compelling public policy or equity considerations” require the taxpayer to demonstrate exceptional circumstances which render the collection of the full tax liability as an act that undermines the public confidence that the tax laws are being administered in a fair and equitable manner.
These are the reasons why the IRS might accept an offer in compromise, but a taxpayer must do his or her due diligence before being eligible to submit such an offer.
Are you eligible to submit an offer in compromise?
If you wish to submit your offer in compromise, you must first:
- File all tax returns you are legally required to file;
- Make all required estimated payments for the current year; and
- Make all required federal tax deposits for the current quarter if you are a business owner with employees.
Note – If you are in an open bankruptcy case, then you are not eligible to submit an offer in compromise. You must first address the pre-petition tax debt through the bankruptcy case, and thereafter address any outstanding tax debt once the bankruptcy case closes.
It is important to be aware of this partial list of concerns when submitting an offer:
- Penalties and interest will continue to accrue during the offer evaluation process.
- Besides the continuing penalties and interest, the IRS can also file a Notice of Federal Tax Lien during the Offer investigation; however, unless a jeopardy situation exists, a request for a Tax Lien will not usually be made until after the final determination has been rendered.
- You cannot make an offer that is only for a tax year or tax period that has not been assessed.
- Any tax refunds or money from a levy served prior to you submitting an offer, will be applied to the tax liability.
- Any payments made with an offer or during the course of the offer investigation will be applied to your tax liability, whether the offer is accepted or not.
- If your offer is accepted, you must continue to file and pay your future tax obligations as they become due for the next 5 years. If you fail to do so, your offer may be defaulted and the compromised tax debts, including penalties and interest will be reinstated.
Making the Offer:
There is an application fee of $150 required when submitting your offer. However, this fee can be waived for individuals meeting the Low Income Certification guidelines. If the fee is not waived, it will not be returned to the taxpayer, but will be applied to the tax liability.
The Offer in Compromise can be made in a couple different ways:
- Lump Sum Cash: requires that 20% of the total offer amount be paid at the same time the offer is submitted. The remainder will be paid within 24 months in accordance with the offer terms.
- Periodic Payment: requires that the taxpayer make an initial payment with the offer, and then make continuous payments on the remaining balance over a period of not more than 24 months in accordance with the proposed terms of the offer.
This is a good stopping point. The general benefits and considerations of the Offer In Compromise have been laid out. But making an offer in compromise is a complicated undertaking, and there are IRS forms to be completed and supporting documents to be gathered. You should become very familiar with the IRS website or obtain the services of a tax professional when getting ready to make an offer in compromise; but be leery of fly-by-night tax outfits. Obtaining the services of an experienced and knowledgeable attorney is a smart choice.