Tax Debt Resolution Options
What is an Offer in Compromise?
Making an Offer in Compromise is one of the most well known methods to settling tax debt with the IRS. In case you have never heard of one or don’t know exactly what it is here is the basic scenario:
The IRS contacts you claiming you owe X number of dollars in say, undeclared income tax. You don’t have X dollars, and are currently unemployed, so there is very little chance that you will have X dollars in the foreseeable future. So, you want to offer the IRS Y number of dollars, with Y being some amount less than X. The IRS then has the option of accepting Y number of dollars in complete satisfaction of your tax debt. By filing an Offer in Compromise, you have just saved yourself Z number of dollars (the difference between X and Y).
However, as is often the case with the IRS, things are not that simple.
Why Would the IRS Accept an Offer in Compromise?
While the taxpayer saves money, the government loses money in an Offer in Compromise. So why would the IRS accept such an offer? There are a few reasons why the IRS makes available the Offer in Compromise process.
- Congress decided that taxpayers deserve a clean start even if they have made mistakes in the past. With one of the requirements of being completely up to date with all your tax returns, Congress figured you deserve a chance to catch up after making sure you are in compliance.
- Some taxpayers are “judgment proof”. If the IRS leans on you when you are already suffering financially, the only thing they may succeed at is crushing your finances completely. If you don’t have any money at that point, what can they get from you? As the saying goes, you cannot get blood from a stone.
- There is a cost to enforcement. Taking taxpayers to Court and running audits costs money. It also costs time. In order to save themselves from having to incur the costs of enforcement and wasting the time of their already limited number of agents and attorneys, the IRS is willing to accept tax debt settlements for less.
- The IRS is buying itself more time. While the Offer in Compromise is under consideration, the statute of limitations (amount of time the IRS has to collect) is tolled (does not expire).
- Disclosure, disclosure, disclosure! While making the offer or convincing the IRS to accept it, the taxpayer might disclose some other facts the IRS can use against them.
How Does a Taxpayer Make an Offer in Compromise?
The short answer is you fill out IRS Form 656. However, an Offer in Compromise should not be submitted until you have a proper tax plan in place. You NEED to consult a tax professional before filing any documents with the IRS for a number of reasons. The majority of Offers in Compromise are rejected. Working with a tax professional can greatly increase your chance of success, or at least make sure the form is filled out properly.
If you are thinking of making an Offer in Compromise to the IRS or have tax issues that need to be addressed, please contact us to discuss your matter. We have helped multiple clients find tax relief through successful Offers in Compromise, and ar here to help you as well.