IRS Program: Offer in Compromise
The IRS has a program called the Offer in Compromise that allows the IRS to compromise outstanding tax liabilities with a financially burdened tax payer for less than the full amount they owe to the federal government. When the IRS accepts an Offer in Compromise they allow the tax payer to pay what they can afford and the remaining balance is wiped clean. The tax payer is then said to be in good standing with the IRS again.
The IRS allows individuals to settle their taxes owed for less in certain circumstances because they realize that when they allow taxpayers to voluntarily pay a fraction of what they owe it is preferable to chasing down people and forcing them to pay through enforced IRS collections. Typically if the IRS does use forced collection mechanisms they will end up with less money after paying the expenses of the IRS collectors.
Qualifying for Offer in Compromise
The IRS only allows individuals that meet a specific set of requirements to compromise their taxes with the IRS. There are three different circumstances in which the IRS will consider a taxpayer for an offer in compromise.
1.) The IRS must doubt that the tax, penalties and interest will be collected in the foreseeable future through the normal collection procedures of the IRS. The IRS refers to this as doubt as to collectability. When the IRS considers doubt as to collectability cases, they mainly consider these three questions. If the answer is “no” to each of these questions then the OIC case has a high probability of being accepted.
- Is it likely that the IRS would be able to collect more through forced collections than if they were to accept the OIC? In other words, the IRS works like a business and they need to be convinced that it is saving them money to accept the OIC rather than using forced collections.
- Is it feasible to let the taxpayer’s financial situation improve a bit over time and collect the taxes in the future?
- Would other people perceive that if the offer was accepted it was improper?
2.) There is doubt that the taxpayers assessed tax liability is correct. This could be because the examiner made an error interpreting the tax code when the assessment was made, the examiner failed to use all the support and evidence that the taxpayer presented or the taxpayer has new documents to prove that the tax amount they were assessed was incorrect. The IRS refers to this as doubt as to liability.
3.) There is no doubt to the amount that is owed, but there are certain circumstances that exist in the particular case that if the IRS were to collect the taxes owed it would create financial hardship or would be unfair and inequitable to the taxpayer. The IRS refers to this as effective tax administration.
If a taxpayer meets any of these three circumstances, there is a chance they may be eligible to receive an offer in compromise settlement. Below are some additional requirements needed in order to qualify for an offer in compromise:
- Cannot be currently going through bankruptcy
- Taxpayer must have filed all federal tax returns that were required for prior years
- If a business, must have filed payroll tax returns for prior two quarters.
- Must pay the Offer in compromise application fee of $150 in order for the request to be processed
- Must submit the proper offer in compromise documentation
Streamlined Offer in Compromise Program
The IRS recently made an announcement (February 2011) stating it was going to start relaxing the requirements on their new “Streamlined Offer In Compromise” program. Now taxpayers making up to $100,000 with up to $50,000 in tax debt may qualify. Many of these new policies will be reviewed in a year, but the IRS is trying to help taxpayers in this tough economy.