Are You Eligible for an IRS Offer in Compromise?
If you find yourself in the unenviable position of owing more taxes than you can pay, then it is possible you may be eligible to settle your federal tax liabilities by submitting an offer in compromise to the IRS. The amount you will offer will be less than the full amount due, however in order for the IRS to consider your offer you will have to meet certain criteria. Primarily the taxpayer must show—to the satisfaction of the Internal Revenue Service—that he or she has no way of paying the taxes owed or does not actually owe the taxes claimed. After 1992, when Offers of Compromise were widely frowned upon, the IRS decided that collecting some money was preferable to collecting none. Rather than settle on an installment agreement which could drag out potentially for years, the IRS can decide to cut their losses and take what is theoretically collectible as soon as possible and with the least amount of financial burden to the government.
Most cases of Offer in Compromise are based on the taxpayer’s inability to pay the taxes in full. Any time the IRS takes a look at a taxpayer’s financial condition and determines they will likely never be able to collect the full amount then the taxpayer can negotiate an offer that reflects the amount of equity in the taxpayer’s assets plus the amount the IRS believes they would be able to collect from future income. While there are certain cases in which the taxpayer feels the IRS has billed them an erroneous amount, unfortunately these are rare. Still, an Offer in Compromise can be used if the taxpayer couldn’t defend himself against an IRS bill yet has discovered additional evidence which proves the amount claimed is not correct. Finally, should the IRS believe a settlement would promote effective administration of taxes, they can require the taxpayer to explain any exceptional circumstances, showing either that paying the taxes in full would create a financial hardship or that such payment would constitute an unfair situation.
Pros and Cons of Accepting an Offer in Compromise
Of course there is usually a downside as well as an upside to most situations, and agreeing to an Offer in Compromise is no exception. The benefits of accepting an Offer in Compromise include the fact that the IRS will hold off on attempting to collect money from you while they are considering your offer. Secondly, once an offer is accepted and completed, any tax liens against you will be released. Finally, an Offer in Compromise ensures the taxpayer can avoid bankruptcy, even reducing taxes that would not have been considered dischargeable in any case during a bankruptcy petition. The downside of accepting an Offer in Compromise include the fact that the taxpayer must fully disclose all their financial information to the government—something few of us would like to do. Some tax benefits may be waived once the Offer is accepted, and a federal Offer in Compromise does nothing to resolve any other debts or taxes due to your state.
How Much Can You Reduce Your Tax Liability?
As stated, the IRS will first determine the worth of the taxpayer’s resources less other money owed which has priority over the Federal tax lien on a discounted basis, then will add in a determination of the taxpayer’s ability to make future payments. In evaluating the taxpayer’s future income prospects, the taxpayer’s education, profession, trade, age, experience, health and past and present income will all be considered to make a determination. One formula the IRS may use to determine your future income is to subtract the necessary monthly living expenses from your monthly income over 4-5 years. These figures added together will equal what the IRS will be willing to accept for the amount you owe. Remember, that once you have entered into an Offer in Compromise Agreement with the IRS you absolutely must remain current on all tax obligations for a period of five years or you risk having your agreement revoked. It can be to your advantage to have a tax attorney help you navigate this type of agreement so you can be sure your interests are being protected.