The IRS created the Offer in Compromise Program to allow some taxpayers a fresh start. It gives taxpayers the option to erase previous tax liabilities in return for a lump sum payment or a settlement of monthly payments if they pledge to comply with the IRS in the future.
Sounds like a fantastic bargain for you, but it’s also a terrific deal for the government because the taxpayer is effectively coming back into compliance with paying everything, and the government saves money by not having to manage the taxpayer’s file. It’s a win-win situation for both sides.
Grounds for Offer in Compromise
There are three grounds for submitting an offer in compromise:
1. Doubt as to collectibility: This is when a taxpayer is unable to make full payment on their tax debt.
2. Doubt as to liability: This is when a tax debt is incorrectly assessed or the amount assessed is erroneous.
3. Effective tax administration: This is when a taxpayer is able to pay their obligation, but doing so would either put them in financial difficulty or be judged unjust due to extenuating circumstances.
The IRS calculates your “reasonable collection potential,” or RCP, based on financial facts about you. This is the amount it believes it can receive from you now and in the future. When determining the RCP, the IRS considers your assets, cars, bank accounts, property, current and future income, basic living costs, where you reside, and even how old your car is, among other factors. Your offer in compromise will not be accepted by the IRS unless it is equal to or more than the RCP.
The IRS may accept an offer in compromise for three reasons:
1. There is a legitimate legal debate over whether or not your tax liability exists, and if so, how much it is.
2. Paying in full would put you in a financial bind or be “unfair and inequitable due to exceptional circumstances.”
3. The IRS doubts it can ever fully collect your debt from you.
How does an offer in compromise work?
The first thing to do is enlist the help of a qualified tax attorney. They will know what to pursue and if an offer in compromise is a viable option.
This is how it works:
You propose to the IRS a monthly payment amount for five months or up to 24 months, and the amount you propose is based on your assets and your monthly income.
They look at the money in your bank accounts. They look at whether or not you own a home. And they look at how much money you’re making plus your monthly expenses.
Depending on where you live and your family situation, you’re allowed different amounts of expenses. If you have a special situation, like medical expenses that are required or children that have special expenses, they might allow that, but you need to provide documentation.
They also take into account how old your debt is. The IRS only has a certain time frame to collect your tax debt, so the older it is, the better chance you have of getting an offer in compromise accepted. This can be a great way to settle a large tax debt for a lot less than you owe.
Can I get an offer in compromise?
The offer-in-compromise program has allowed us to save our clients hundreds of thousands of dollars. We’ve had settlements for more than 99% of the tax liabilities due. We’ve settled a case of $40,000 for $2,000, $140,000 for $4,000. So potential settlements like this do exist.
Want to know if you qualify for an offer in compromise? Reach out to our tax resolution firm, and we’ll schedule a free, no-obligation, confidential consultation to explain your options in full to permanently resolve your tax problem.
