In certain situations, the Internal Revenue Service may be willing to accept less than the full amount owed by a taxpayer for federal income taxes. The IRS is willing to compromise with a taxpayer under four circumstances: first, there is doubt as to whether the taxpayer actually owes the taxes; second, there is doubt that the assessed tax is correct; third, there is doubt as to the actual collectibility of the amount owed; and fourth, for effective tax administration. In the last category, the IRS will consider less than full payment even the tax is owed, the amount is correct, and it is collectible but to do so would create a severe economic hardship on the taxpayer and would be unfair and inequitable.
The IRS has given examples of what it considers hardship and equity factors that might qualify a taxpayer for the acceptance of an offer in compromise and a reduced tax liability. A taxpayer incapable of earning a living due to a long-term illness or a disability might qualify, as would a taxpayer with a dependent whose care uses all the taxpayer's financial resources for basic living expenses and medical care. The IRS might find economic hardship in a situation where the taxpayer could not meet his basic living expenses if his assets were liquidated in order to pay the tax owed or where the taxpayer was unable to borrow against his assets and a seizure and sale of the assets would have sufficiently adverse consequences to make an enforced collection unlikely.
A taxpayer seeking to make an offer in compromise must file a written application with the IRS on a special form accompanied by an application fee. The application fee is required unless the basis for the request is doubt as to the taxpayer's liability or the taxpayer's monthly income is below the established poverty level. The application should include the liabilities to be covered, the legal grounds for the requested relief, the amount of payment proposed, and the payment terms and schedule. The taxpayer can propose payment by a lump sum, by monthly payments, or by a combination of the two. However, the longer the payment term, the higher the amount the IRS will be willing to accept.
In order to qualify for an offer in compromise, a taxpayer should have filed all required federal tax returns, and if the taxpayer is a business, it should have filed and paid recent employment tax liabilities. The IRS will not accept an offer in compromise from a taxpayer who is a debtor in a bankruptcy case.
Once a taxpayer's offer has been accepted for processing, future levies are prohibited and the statute of limitations on collection is suspended. The IRS will keep all payments and credits made up until the application was submitted, included the proceeds of any levy served before the application was filed.
In determining how much of a compromise to accept, the IRS seeks to collect the maximum amount that a taxpayer can pay after his basic living expenses are paid. In order to calculate living expenses, the IRS refers to local and national expense tables, but exceptions to those tables can be made for a taxpayer's obligations such as the special educational needs of children. The value of a taxpayer's assets is also taken into consideration is setting the amount of compromise accepted by the IRS. The IRS verifies the information supplied by a taxpayer in his application for an offer in compromise by its own internal sources and by public and electronic sources.
If the IRS rejects a taxpayer's application, the taxpayer has 30 days to challenge the decision. However, if the IRS has determined that the taxpayer applied for a compromise solely to hinder or delay collection actions, the taxpayer has no right to appeal.
Copyright 2013 LexisNexis, a division of Reed Elsevier Inc.