Offers in Compromise to Resolve Tax Debts
At its discretion, the IRS can agree to an offer in compromise made by a taxpayer. This settles the debt that they owe on a tax bill for a lesser amount. The IRS accepts a substantial percentage of offers in compromise, so this may be a useful path to explore if you are dealing with tax debt. To be eligible for this remedy, you likely must show that it is doubtful that the IRS can collect the debt from you for the foreseeable future, or that you would face an economic hardship if you paid off the full tax debt, due to exceptional circumstances. In rare cases, a taxpayer may make an offer in compromise on a basis known as doubt as to liability, which means that there may be an error in the amount of tax liability that has been assessed.
You must submit Form 656 to the IRS to make an offer in compromise. While there is a filing fee, you may qualify for a waiver if your income is below the poverty guidelines. You also must make financial disclosures to the IRS through Form 433-A if you are filing as an individual or Form 433-B if you are making an offer in compromise on behalf of a business. A married taxpayer who lives in a community property state and has separate tax debt may need to make some disclosures regarding their spouse. You should make sure that all of this information is accurate, since the IRS will review it carefully. It likely will not accept an offer in compromise if it finds that you have provided false or misleading information.
Calculating the Offer
Form 433 will help you determine your minimum offer. You will need to start by calculating the net realizable value of your assets and adding any excess monthly income. You can find your excess monthly income by calculating your monthly income and then subtracting reasonable monthly expenses from it. Finally, you will multiply the sum of the net realizable value of your assets and your excess monthly income by 12 if you are seeking a five-month payment period, or by 24 if you are seeking a two-year payment period. You will need to provide your calculations to the IRS on Form 433 so that it can verify that you are making an appropriate minimum offer for your situation.
You should try to avoid submitting an offer that is likely to be rejected. The financial information that you provide to the IRS can be used against you in collection efforts. This may result in more aggressive pursuit of your tax debt if the offer in compromise is rejected. Also, you will owe interest that accumulates during the period of negotiating an offer in compromise if the deal falls through. This can make your debt burden much greater.
The Effective Tax Administration Exception
If you cannot possibly pay the minimum offer amount described in the calculations above, you may want to consider whether the effective tax administration exception might apply to your situation. Under the exception, the IRS has discretion to accept an amount smaller than the minimum amount required under the standard rules. People who have physical or mental disabilities, or people who are elderly, may receive special consideration. You also may persuade the IRS to accept a more favorable offer in compromise if you are dealing with a serious issue involving a family member that affects your finances. You can attach a statement to Form 433 that explains why you should receive special consideration, while documenting the basis for your request. For example, if a serious medical condition prevents you from working, you should include any medical records that support this claim.
When an Offer in Compromise is Rejected
Unless you are a convicted felon or another type of “notorious character,” the IRS probably would reject an offer in compromise only if it is too low. If the IRS rejects your offer, you should ask for a copy of the report, which will explain the reasons for the rejection. The IRS also will tell you the amount that it considers acceptable if it rejects the offer because it is too low. Then, you can adjust your offer to make it more attractive. If you make a new offer within a month that is only slightly different from the previous offer, you do not need to submit a new copy of Form 656. You can simply send a letter indicating that you are increasing the amount of money that you are offering.
If you cannot improve your offer or persuade the IRS to reconsider your offer, you can appeal the rejection of an offer in compromise to the Appeals office. This involves submitting Form 13711 within 30 days of the date of the rejection letter. To have your appeal heard, you will need to show that you have filed all of your past tax returns, you have complied with any IRS requests for information during the offer in compromise process, and you have kept up with your tax payments for the current year. (If you are self-employed, you must have kept up with quarterly estimated payments. If you run a business with employees, you must have kept up with payroll tax filings and deposits.)
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