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Understanding The Offer In Compromise Application

The IRS often settles tax debt for significantly less than what is owed. You've seen the commercials on the TV and the ads on the radio. "Settle your tax debt for pennies on the dollar." While these ads can be misleading, since few taxpayers actually qualify to settle tax debt, there is an element of truth to them. Namely, you can actually settle a tax debt if you fit within certain defined criteria. This is called an offer-in-compromise program. The "offer" is made by the taxpayer as a compromise to the tax debt that the taxpayer owes.

The IRS' policy is to settle a tax debt (i.e., approve an offer in compromise) when it is unlikely that (i) the IRS can collect the tax liability in full and (ii) the amount offered by the taxpayer reasonably reflects collection potential.

There are two prerequisites to qualify for the offer in compromise. First, the tax liability must be assessed. Second, there must be doubt as to liability, doubt as to collectibility, both, or a compromise that would promote effective tax administration.

Doubt as to collectibility means the IRS considers it unlikely that it will be able to collect the taxes you owe. Doubt as to liability means that you believe that the IRS made a mistake in calculating the amount of tax you owe. Finally, effective tax administration means that the IRS believes that full collection will create economic hardship or be unfair or unreasonable. Usually, to show that the collection is unfair or unreasonable, the taxpayer must identify compelling public policy or equity considerations, such as exceptional circumstances that exist so that collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner.

The offer in compromise application process can be a lengthy one. It may take more than a year in some cases. It typically requires disclosure of your income and expense and your assets and liabilities. This type of full disclosure is required, so that the IRS knows your complete financial circumstances. Taxpayers who would like to learn more about settling their tax debt, would be well advised to contact a tax professional. The reward for successfully qualifying for an offer in compromise can be significant, indeed. A tax professional can help you get the results.

To apply for an offer in compromise, speak to a tax professional today!

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