Offers in Compromise

The Internal Revenue Code allows the Internal Revenue Service to compromise tax liabilities through the Offer In Compromise. The Offer In Compromise is a way to settle unpaid tax accounts for less than the full amount of the assessed balance due. The Offer In Compromise can be submitted by the Taxpayer to cover all taxes, penalties and interest. Once the Offer In Compromise is accepted, a contract exists whereby the Taxpayer must comply with all the terms of the Offer In Compromise in exchange for the Internal Revenue Service’s agreement to reduce the tax liability owed. The Offer In Compromise objectives are: (1) to effect collection of what could reasonably be collected at the earliest time possible and at least cost to the government; (2) to achieve a resolution that is in the best interest of the both the Taxpayer and the government; (3) to give the Taxpayer a fresh start and to enable him or her to voluntarily comply with the tax laws; and (4) to collect funds which may not be collectible through any other means. The IRS Form 656, Offer In Compromise, sets forth requirements applicable to the Taxpayer and the Internal Revenue Service. The Offer In Compromise requires the Taxpayer to keep current on the Taxpayer’s payment and filing requirements for five years from the date of acceptance of the Offer In Compromise. The Internal Revenue Service will abate the tax liability after the Offer In Compromise amount has been paid in full. There are three types of Offer In Compromise: (1) Doubt As To Liability; (2) Doubt As To Collectibility; and (3) Effective Tax Administration.

The Taxpayer can submit a Form 656-L to challenge the merits of a tax liability. The Taxpayer must set forth the factual and legal support for the Taxpayer’s position and attach relevant declarations and other evidence supporting that position. The Taxpayer’s stated position should include a statement explaining why the Taxpayer does not owe the liability. The Taxpayer should also state the amount he or she is offering and the time frame in which the offer amount will be paid. An Offer asserting Doubt As To Liability can not be made if the liability in question has arisen from a final court decision.

The Taxpayer can also submit a Form 656 based on Doubt As To Collectibility. Doubt As To Collectibility exists if the Taxpayer’s reasonable collection potential is less than the full amount of the Taxpayer’s tax liability. The reasonable collection potential of the Taxpayer is roughly defined as the fair market value of the Taxpayer’s assets plus 12 to 24 months of the Taxpayer’s disposable income. The Taxpayer may use 12 months of disposable income to compute his or her reasonable collection potential if payment of the Offer is made in less than 5 months. If the Taxpayer makes payment of the Offer in more than 5 months he or she should use 24 months of disposable income in computing the reasonable collection potential.

In addition to the traditional Doubt as to Liability and Doubt as to Collectibility grounds, the Internal Revenue Service may take into account economic hardship for individual taxpayers to promote Effective Tax Administration. The Internal Revenue Service may enter into an Offer In Compromise with an individual taxpayer to promote Effective Tax Administration when the Internal Revenue Service determines that, although full collection is possible, collection of the entire liability would cause the Taxpayer severe economic hardship.