Offers in Compromise

So you've gotten your tax bill, and there's no way you can pay the IRS what's owed. What now? If your financial situation is really dire, consider what the IRS calls an offer in compromise ("OIC") to pay only a portion of what you owe.

For the IRS to consider an OIC, you must meet one of these three grounds: doubt as to collectability, doubt as to liability or effective tax administration.

With regards to doubt as to collectability, you must convince the IRS that it's doubtful they'll be able to collect what you owe them, either now or in the future.

With doubt as to liability, you must show the IRS that there is a legitimate doubt as to whether the assessed tax liability is correct. Reasons why this may occur include:

1. The examiner made a mistake interpreting the law
,
2. The examiner failed to consider the taxpayer's evidence
3. The taxpayer has new evidence showing the accessed tax liability is incorrect

In asserting effective tax administration, you must convince the IRS that an exceptional circumstance exists and you will face economic hardship if the tax that you owe is collected even though there is a potential to collect the full amount owed.

Generally, the IRS will not accept an OIC unless you have reasonable collection potential ("RCP"). This means that the amount of money you're offering is at least equal to the value of all your assets plus all the money the IRS thinks they can take from any future income you may have. Furthermore, you must have already filed all returns due, and not be involved in any bankruptcy proceedings.

The IRS figures the value of assets by estimating what they'd end up with if they seized all your property, paid off any debts (such as a mortgage) on the property and sold it all. To figure this out for yourself, you can calculate the quick sale value ("QSV") of your assets by subtracting 20 percent from the fair market value.

How does the IRS figure out what your future income will be? Usually, the IRS arrives at a figure called excess earnings by subtracting your necessary living expenses from your present or estimated monthly income. The IRS will then:

• Multiply this number by 48 if you're offering to pay cash within 90 days
• Multiply this number by 60, if you want to spread your payments out over two years
• Use some other multiplier if you're offering to spread your payments out over the time period left that the IRS is allowed to collect from you (known as the "statute of limitations").

You may also have a better chance at getting the IRS to accept an OIC if you can prove that paying the debt would create an economic hardship or would be unfair and inequitable. This may be the case if:

• You're elderly and will find it difficult to find gainful employment
• You have disabilities that make it difficult to work
• You have a large number of medical bills due to your illness or the illness of a family member

The Offer In Compromise Process

To start the OIC process, you'll first fill out an IRS Offer Form, Form 656 providing:

• All taxes owed
• Identifying information such as social security number and employer
• Your marital status
• An explanation of your circumstances
• The reasons why you believe the full amount you owe isn't collectable
• Your source of funds for paying the amount you're offering

The IRS may reject your offer if it concludes that the offer doesn't equal your reasonable collection potential. If the IRS rejects your offer, the rejection letter will likely include what amount the IRS would find acceptable.

You're free to make another offer to the IRS that is more than what you previously offered, but that is less than what the IRS suggested as appropriate. It may also help to talk with IRS personnel to see how flexible they might be.

If the IRS accepts your offer in compromise, you'll be expected to make all payments and file all future returns on time. If you don't, the IRS can cancel their acceptance of the offer in compromise and then you'll have to pay the full amount that was originally due, plus penalties and interest.

If you can't come to an agreement on an appropriate amount to be paid, you can always formally appeal the rejection of your offer in compromise. The appeal must:

• Be in writing
• Be sent within 30 days of the date of the IRS rejection letter
• Supply all the documentation that was provided to the IRS when you made the Offer in Compromise

Although it might take a little bit of work to fill out the forms, an offer in compromise is a good idea when your financial options are limited and you owe the IRS more than you'll ever be able to pay.

Question For Your Attorney

• I don't know if I'll be able to offer payments equal to the value of all my assets. What should I do?
• What should I do after I send in my appeal to the IRS' rejection of my offer in compromise?
• I negotiated an offer in compromise with the IRS. However, my financial situation has improved and I am now able to pay my taxes. What should I do?
• I negotiated an offer in compromise with the IRS. However, my financial situation is worse than before and I am now not able to the portion of taxes that I promised. What should I do?

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