The IRS has the power to compromise or settle any tax liability. The IRS also has the power to compromise any criminal tax liability before the case is referred to the Department of Justice.
The IRS settles tax liabilities with its offer-in-compromise program.
The regulations provide three bases for approving an offer-in-compromise: doubt as to liability, doubt as to collectability, or promotion of effective tax administration.
Doubt as to Liability
An offer-in-compromise based on doubt as to liability is used to challenge the existence or amount of the underlying tax liability. This is similar to filing an amended tax return in that it can result in the amount of tax being corrected on the IRS’s books.
Doubt as to Collectability
An offer-in-compromise based on doubt as to collectability is not a challenge to the existence or amount of the underlying tax liability. It is a challenge to the IRS’s ability to collect. More specifically, it is an assertion by the taxpayer that the taxpayer’s assets and income are such that the IRS is not likely to collect some or all of the tax liability.
Doubt as to collectability exists in any case where the taxpayer’s assets and income are less than the full amount of the assessed liability. A doubt as to collectability offer-in-compromise will often be accepted by the IRS if the amount offered is at least equal to the taxpayer’s reasonable collection potential.
The IRS has established standardized guidelines to determine a taxpayer’s reasonable collection potential. These guidelines set forth national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses. National standards are used to determine a taxpayer’s food, clothing, health care, personal care, and miscellaneous expenses. Local standards are used to determine a taxpayer’s housing, utilities, and transportation expenses.
Promotion of Effective Tax Administration
The offer-in-compromise to probate effective tax administration is also based on the IRS’s ability to collect.
With this type of offer, the IRS has the power to accept the offer if:
- the taxpayer can demonstrate that full collection would cause the taxpayer economic hardship or
- if there are compelling public policy or equity considerations.
The IRS cannot grant an offer-in-compromise to promote effective tax administration where doing so would undermine compliance with the tax laws. The IRS is to grant an offer when exceptional circumstances exist such that collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner.
Getting an Offer Accepted
There are strategies for getting an offer accepted. This often involves making a reasonable offer, presenting the absolute best offer package and documentation possible, and, if all else fails, being willing to negotiate with the IRS as to the amount of the offer.
We have helped hundreds of taxpayers settle their tax debts with the IRS.
If you have an unpaid tax debt and want to settle with the IRS, we’d like to hear from you. Please call us at (469) 895-5141 to schedule an appointment.