Back Taxes: The Offer in Compromise

Posted on 21. Apr, 2012 by in Back Taxes, How to File Back Tax Returns, Need to File Back Tax Returns

An Offer In Compromise (OIC) is an arrangement made between the Internal Revenue Service (IRS) and a taxpayer to settle the taxpayer’s liability for less than the original amount that is owed.  A taxpayer must qualify for an OIC and the IRS will not accept an OIC agreement if it is believed that the taxpayer can afford to pay the amount of the original debt either in full or under a payment plan.

There are three grounds in which a taxpayer can qualify for an OIC.

  1. Doubt as to Collectibility.  In this case, the IRS believes that the taxpayer is unable to pay the full amount of the tax debt within the allowable time.  The taxpayer may agree with the amount of the tax debt, however, circumstances exist where the individual is unable to afford to pay in full or to set up a payment plan as their current income does not cover living expenses.
  2. Doubt as to Liability.  In this situation, the taxpayer has a legitimate cause that they are not liable for the amount of the tax owed.
  3. Effective Tax Administration.  For this ground, there is no question regarding the tax liability and the potential does exist for the taxpayer to pay the debt , however, there are extenuating circumstances for the taxpayer.  The taxpayer would need to prove that paying the tax debt would cause an undue economic hardship or is inequitable.

The burden of proof for the grounds to submit an offer in compromise lies with the taxpayer.   In the instance of proving collectability, the taxpayer will need to provide their financial profile to include income, expenses, and all assets.  The IRS clearly outlines allowable living expenses and the determined equity in specific assets.  During the approval process for an OIC, the IRS is prohibited from collecting owed taxes by means of a levy.  If the OIC is declined, taxpayers may appeal the decision and avoid tax collection by levy for 30 days following the rejection.  Filing the OIC may be the best method to ease IRS tax collection.   It will take one to two years to complete the offer in compromise process.  This is dependant mostly on the amount of time that it takes the IRS to review the application.

Hiring the right tax professional is key in properly filing the Offer In Compromise.   Settling delinquent tax debt for less than is owed can save taxpayers thousands of dollars.  It may be the best solution to alleviate IRS debt woes and the mounting liability which results from accruing additional fees and penalties.

We are committed to helping you with your back tax returns.  Our experienced team of CPAs and tax professionals know how to deal with IRS tax issues.  We will work on your behalf to settle your tax problem in your favor.

Your tax problem will certainly not go away on it’s own.  Call us now at 1-888-570-1033 for a FREE consultation.

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