IRS Offer in Compromise - Reduce or Eliminate IRS Tax Debts
Updated: Apr 21
Taxpayers often hear commercials for one particular Internal Revenue Service (IRS) program that promises to settle past due tax liabilities for pennies on the dollar and wonder if the program is too good to be true. That IRS program is the Offer in Compromise. An Offer in Compromise is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer's tax liabilities for less than the full amount owed. Under certain circumstances tax debts may be settled for a small fraction of the total amount due, including interest and penalties. Due to the Offer in Compromise' generous benefit of actual dollar reduction in liabilities, the qualifying requirements are many, including future compliance obligations. While the requirements are demanding, the good news is the IRS has a policy to compromise tax liabilities when the IRS cannot reasonably expect to be repaid in full.
What are the Requirements to Make an Offer in Compromise?
In general, to make an Offer in Compromise, taxpayers must provide their current financial information including sources of income, expenses, assets and equity in assets. The IRS uses this information to determine the reasonable collection potential of the taxpayer's delinquent taxes, penalties and interest. The IRS also uses this information to determine if the taxpayer can fully pay the tax liabilities under an installment agreement or if the taxpayer could be put in currently not collectible status (another blog post) to defer collection enforcement until the taxpayer's financial picture improves.
IRS Considerations for Approving an Offer in Compromise
Weighing the total tax liability against a realistic potential collection amount makes sense when considering taxpayers with past tax liabilities must usually also pay current tax liabilities to avoid those from becoming unpaid and overdue. Add paying for basic living expenses into the calculation and the IRS can quickly see that sometimes forcing taxpayers to pay all past taxes will create a never ending cycle of unpaid taxes. This problem provides the basis for the "fresh start" that the IRS program promises.
Taxpayers Must File Required Tax Returns
When considering making an Offer in Compromise, taxpayers must remember that only reported or assessed tax liabilities can be compromised. Taxpayers with unfiled tax returns must file those returns, therefore, to have those liabilities included in the offer. As a general rule, the IRS will look back six years for unfiled returns and not assess taxes beyond six years prior to the current year. That is a general rule, and circumstances exist where the IRS will look back further. Once the returns are filed and on record, the IRS will consider an offer that includes complete information.
How Much Must an Offer in Compromise Be?
An Offer in Compromise is generally either a lump sum offer or a periodic payment offer. A lump sum offer must include the payment of 20% of the proposed offer with the offer application and promise to pay the offer amount in five payments or less within five months of the IRS accepting the offer. The periodic payment offer must include the first installment payment and terms for paying the offer amount over a period of six to twenty-four months from the time of the offer. In addition, the taxpayer must timely file and pay taxes for a period of five years beginning on the date the offer is accepted to avoid terminating the offer in compromise. This may seem harsh because it requires timely filing of all returns and timely payments in full of these liabilities, but this is the major benefit to the IRS in regards to effective tax administration and ensuring compliance with tax laws. If a taxpayer can maintain compliance for five years, odds are they will remain compliant beyond that period and not be a worry to the IRS in the future.
If you are concerned about an unpaid tax liability and would like to discuss the offer in compromise program, contact Steiger Tax Law at (248) 259-6367 for a free consultation to discuss options and your current tax situation.