Offers in Compromise – I.R.S. Debt Collection Alternatives

If you cannot afford to pay the full amount of your tax debt owed to the Internal Revenue Service (“I.R.S.”), or do not believe that you legally owe such debt, there may be collection alternatives available to you. One of these alternatives is the Offers in Compromise.

What are Grounds to Submit an Offer in Compromise?

An offer in compromise allows the I.R.S. to accept less than the taxpayer’s full tax liability as settlement of the debt owed. There are three grounds upon which a taxpayer may submit an offer in compromise: (1) doubt as to collectability; (2) doubt as to liability; or (3) effective tax administration.

What are Offers based on Doubt as to Collectability?

For an offer in compromise based on doubt as to collectability, the taxpayer must be unable to pay the full amount of the debt. The I.R.S. will instead accept an offer that is equal to or in excess of the reasonable collection potential. The reasonable collection potential is utilized by the I.R.S. to calculate the amount a taxpayer is able to pay and looks at assets, property, and future income. However, if there are special circumstances that make it appropriate for the I.R.S. to accept less than the reasonable collection potential, such as full payment of the reasonable collection potential causing economic hardship, the I.R.S. may take these circumstances into consideration and accept less than the taxpayer’s reasonable collection potential.

What are Offers based on Doubt as to Liability?

For an offer based on doubt as to liability, there must be a genuine legal dispute as to the amount owed by the taxpayer. This offer is submitted when a taxpayer legitimately believes that he or she does not owe all or part of the assessed tax debt. For instance, the I.R.S. provides the example of a taxpayer missing a meeting with an auditor due to a natural disaster and having all expenses disallowed (even though he had appropriate documentation) as an appropriate use of the offer based on doubt as to liability.

What are Offers based on Effective Tax Administration?

Offers based on effective tax administration may be accepted on one of two grounds – effective tax administration or public policy concerns. To present an offer based on effective tax administration on either basis, the taxpayer must be able to pay the balance in full. For an offer based on an economic hardship basis, the I.R.S. will accept such as offer if collection of the full amount owed would cause the taxpayer economic hardship. Economic hardship occurs if payment of the debt in full would result in the inability to pay necessary basic living expenses.

What are Offers based on Public Policy?

Offers based on public policy concerns are granted very rarely and are subject to a very steep burden on the taxpayer to demonstrate that the circumstances are compelling enough to justify compromise even in the light the inherent inequity of granting such an offer. For instance, acceptance of an offer based on public policy concerns may promote effective tax administration where the I.R.S. has made a processing error, the taxpayer relied on incorrect advice from the I.R.S., or where there has been unreasonable delay by the I.R.S. Additionally, fraudulent or criminal acts by third parties will be considered as well as the effect that rejection of the offer would have on the taxpayer’s community. However, it must always be kept in mind that public policy concerns do not encompass situations where the taxpayer believes that the tax law itself is unfair; there must be some kind of extraordinary circumstances related to the taxpayer’s individual situation.

Offers of any kind can either be a lump sum cash offer or a periodic payment offer. Lump sum offers are payable in not more than five installments within five months of acceptance of the offer and must be submitted with a payment of 20% of the total offer amount. Periodic payment offers are payable in more than five installments and cannot exceed a total of twenty-four months.

Co-authored by: Attorney Bradley C. Sagraves & Attorney Kaitlyn A. Sell