The IRS and Offers in Compromise

Federal taxes are filled with intricate details, multiple rules, mounds of required paperwork and important deadlines. The added elements of health issues and financial hardship can magnify the burden. There are times that all of the difficulties of the process and of life can lead to an inability to pay what is owed to the Internal Revenue Service (IRS). The failure to pay leads to an audit, allowing the IRS to research the situation and determine accountability of the taxpayer. Fortunately, the audit can lead to a settlement in the form of Offers in Compromise.

An Offer in Compromise is an agreement between the IRS and the taxpayer to settle all tax liabilities for an amount that is less than originally owed. This is not an easy agreement to reach and is based on very strict guidelines. The officials will first verify if the taxpayer has the assets to pay the total amount owed. This is called Reasonable Collection Potential and incorporates all assets, including future income less necessary living expenses. If the potential to pay does not exist, the IRS will agree upon an amount that the taxpayer is able to pay.

An agreement based on the inability to pay is the most common form of an Offer in Compromise, but it is not the only one. There are a total of three types. The first, based on financial strength, is called Doubt as to Collectability. The second type is called Doubt as to Liability. This type of settlement centers on the inability of the IRS to determine the truth in what is owed. This question arises due to possible errors made in the audit, lack of evidence, or new evidence supplied by the taxpayer. Both parties recognize the problematic outcome and reach an agreement on payment. The third type falls under the Executive Tax Administration. This is reserved for very rare situations where the taxpayer is capable of paying the debt, but has special circumstances that require maintaining their assets. An example would be a family that has a very ill dependent that requires lifelong care. The IRS will allow the taxpayers to keep enough of their assets to manage any necessary medical needs.

Although the IRS is known for strict rules and indifference, there are opportunities to show valid reasons for not paying tax debt. An Offer of Compromise will establish a payment plan that will allow the taxpayer to remain legally and financially responsible.

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