The U.S. tax system is built on the premise that all taxpayers are expected to report their tax liabilities accurately and pay them on time. However, the Internal Revenue Code gives the IRS the authority to “compromise” (i.e., settle based on a taxpayer’s adverse economic circumstances) a tax liability for less than its stated amount.
Do you qualify for an offer-in-compromise? Generally, if you can pay your tax liability in full, even if it takes a few years, you won’t qualify for an offer-in-compromise. On the other hand, if your financial circumstances are such that you will never be able to pay off the debt, there is doubt as to the liability for the tax or there are special circumstances, the IRS is allowed to compromise in these instances:
- Doubt exists as to the liability - This means that there is doubt that the assessed tax is correct. If you do not think that you owe the tax liability, then you may submit an OIC for “Doubt as to Liability.” You must submit a detailed written statement explaining why you believe you do not owe the tax that you want to compromise. You are not required to submit a collection information statement if you are submitting an offer based on doubt of liability alone.
- Doubt exists as to the liability’s collectibility - Doubt exists that you could ever pay the full amount of tax owed. Before the IRS can consider a doubt as to collectibility offer (absent special circumstances), the taxpayer must not be able to pay the taxes in full either by liquidating assets or through current installment agreement guidelines. You must submit the appropriate collection information statement along with all required supporting documents.
- It would advance effective tax administration to settle the liability - This means that the taxpayer does not have any doubt that the tax is correct and there is no doubt that the full amount of tax owed could be collected, but an exceptional circumstance exists that would allow the IRS to consider your offer. To be eligible for compromise on this basis, you must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable. If you are requesting an ETA offer, you must submit: a collection information statement with all appropriate attachments and a written narrative explaining your special circumstances and why paying the tax liability in full would create an economic hardship or would be unfair and inequitable.
Note: Although the IRS may compromise any civil or criminal case arising under the Internal Revenue Code, once IRS sends a case to the Department of Justice, the latter gains jurisdiction over its outcome.
Additional limiting factors – Except for offers based solely on “doubt as to liability,” your offer-in-compromise cannot be processed and will be returned by the IRS if:
1. You currently have an open bankruptcy proceeding. Note: You should consult your Bankruptcy Attorney if you are not certain or if you are contemplating bankruptcy.
2. If you have any unfiled federal tax returns that you are required to file. All tax returns that you were legally required to file prior to submitting an offer-in-compromise must be filed, including but not limited to: All Income Tax, Employment Tax and Excise Tax returns, along with all required Partnership, Limited Liability Corporations or closely held Sub-Chapter S Corporation returns.
3. If you are a business with employees, and you failed to timely make any required federal tax deposits for the current quarter and the two immediate preceding quarters.
If you think you qualify for an offer-in-compromise, please give us a call so we can discuss what is needed and set up an appointment.