IRS Offer in Compromise Basics
An offer in compromise is an agreement between the Taxpayer and the Government that settles tax liability for payment of less than the full amount owed. There is no limit to the amount of tax liability that can be compromised and the IRS is usually willing to work with taxpayers who have clean hands and demonstrate intent to comply in the future. The grounds for compromise are (1) doubt as to collectability, (2) doubt as to liability, and (3) to promote effective tax administration.
A doubt to collectability exists when genuine doubts exists that the IRS will be able to collect the full liability amount within the collection period for example where the time left for the IRS to collect the debt is almost up and it is unlikely the debt can be collected in that time period.
A doubt to liability exists when there is a genuine disagreement as to the existence or amount of the correct tax owed under law.
Promoting effective tax administration is available if a financial hardship exists, public policy dictates it, or sufficient equitable considerations exists. Financial hardship effective tax administration compromises are only available to individuals and not corporations, partnerships, or other entities. Under effective tax administration, the IRS can compromise a liability based on public policy and equitable considerations if the Taxpayer can show that forcing payment in full would undermine the public’s confidence that the tax laws are being administered in a fair and equitable matter. This is the grounds that has the most flexibility and that most taxpayers will qualify under.
In order to be eligible for an offer in compromise, a Taxpayer must file all tax returns that are legally required to be filed, A Taxpayer should file an offer in compromise by Form 656. A completed offer must include, in addition to Form 656, either a completed and signed Form 433-A for individuals or Form 433-B for businesses, the application fee and the initial payment. The requirement for the application fee and initial payment can be waived if a low income certification is met.
Offers in compromise are just one of the tools available to your tax attorney to help relieve a taxpayers burden. Call us to discuss it and other strategies if you are currently under threatened or actual levy or lien by the IRS.