March 24, 2010 12:00 am

Offers in Compromise

If you have a large tax bill outstanding and are currently in a tough financial situation, you may be able to negotiate a settlement with the IRS to pay less than the full amount owed. This is done by making an offer in compromise, which the IRS may or may not accept. Unlike some TV infomercials touting the ability to pay only pennies on the dollar, the offer in compromise process takes time and does not necessarily result in large tax reductions. Offers in compromise, however, can provide needed relief for some taxpayers in difficult circumstances.

Is an Offer Possible?

If, because of health or finances, you don’t expect to be able to pay an outstanding tax bill over time (using an installment agreement), you may want to negotiate for a reduced settlement. The IRS considers this in three cases:

  1. When there is doubt as to collectibility-the taxpayer agrees to the amount owed but because of circumstances there is considerable uncertainty that the amount will ever be paid. The IRS considers that there is doubt as to collectibility when the taxpayer is unable to pay the taxes in full either by liquidating assets or through current installment agreement guidelines. The fact that you are already making payments under an installment agreement doesn’t prevent you from making an offer in compromise if you’ve experienced a change in circumstances.
  2. When there is doubt as to liability-the taxpayer disagrees with the amount owed and has new evidence or the examiner may have made a mistake.
  3. When accepting an offer is part of effective tax administration-the tax is not in doubt, but a taxpayer’s life situation (because of assets, health, work, etc.) means the amount will never be paid. In other words, there are exceptional circumstances that warrant the IRS to accept the offer.

Making an Offer

You must file Form 656, Offer in Compromise, with the IRS, along with an application fee. There are three types of offers you can make:

  1. Lump-Sum Cash Offer. This must be payable in five or fewer installments. The application fee is 20% of the amount offered, plus $150.
  2. Short-Term Periodic Payment Offer. This must be paid in installments within 24 months of the date the IRS received the offer. The application fee is the first payment, plus $150.
  3. Deferred Periodic Payment Offer. This must be paid in installments over the remaining statutory period for collecting the tax. The application fee is the first payment, plus $150.

Note: If your offer is not accepted, any payment you’ve already made will be applied toward your outstanding tax bill and will not be returned to you.

Factors Helpful in Getting Your Offer Accepted

The IRS bases its decision on an estimate of your ability to pay now and in the future after taking into account your assets and income after subtracting necessary living expenses. As a general rule, your current income is used as a basis for the analysis of your future ability to pay.

Factors influencing an IRS decision include age; marital status; number and age of dependents, if any; level of education; occupational training; and work experience.

The IRS will also take into account:

  • Temporary or recent unemployment or underemployment
  • Unemployment and not expected to return to a previous occupation or level of earnings
  • Long-term unemployed or underemployed
  • An irregular employment history or fluctuating income
  • Poor health, where the ability to continue working is questionable
  • Close to retirement
  • Likely to file for bankruptcy

Form 656-B, Offer in Compromise Booklet, at www.irs.gov/pub/irs-pdf/f656b.pdf, can be used to help you assess whether you may qualify for this tax relief and how the IRS will view your offer.

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Tax Glossary

Deductions

Items directly reducing income. Personal deductions such as for mortgage interest, state and local taxes, and charitable contributions are allowed only if deductions are itemized on Schedule A, but deductions such as for alimony, capital losses, moving expenses to a new job location, business losses, student loan interest, and IRA and Keogh deductions are deducted from gross income even if itemized deductions are not claimed.

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