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Established by the Internal Revenue Service, the Offer in Compromise Program is a formal application to the IRS requesting that it accept less than full payment for what you owe in taxes, interest, and penalties.
An offer in compromise may allow you to settle tax liabilities at a substantial discount on the basis of doubt as to collectability, liability, or effective tax administration. In addition, while your offer is under consideration, the Internal Revenue Service is prohibited from instituting any levies of your assets and wages.
While an offer in compromise can help pay IRS debt for less, most people do not have the necessary skills or knowledge of the IRS collection process to make an offer in compromise that is in their best interest.
Many people fill out the forms incorrectly, overstate their assets and income, and offer too much. Government figures show that 75% of offers are returned at the beginning due to forms being filled out incorrectly, and of the 25% that are processed, approximately 50% are rejected.
The following are examples of the two most frequent types of Offers in Compromise, doubt as to collectability and doubt as to liability:
- Doubt as to Collectability: Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.
Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
- Doubt as to Liability: A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.
Example: The taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.