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Know what IRS means by ‘offer in compromise’

John Alan Cohan Published on 01 May 2011

There are many websites and radio advertisements that offer services to help “compromise” IRS tax bills.

Many of these offers make dubious claims and can entail up-front costs that exceed the results produced.

Some of these promoters advertise that they can settle your tax debt for “pennies on the dollar,” which is a false and misleading claim.

If you receive a tax bill from the IRS – after an audit, for example, or if you have entered into an agreement to settle a tax dispute with the auditor, IRS Appeals or the U.S. Tax Court – it is still possible to further compromise the amount due.

This can be accomplished through the IRS Offers in Compromise procedure. If a large amount is at stake, it is advisable to have a tax attorney assist you.

The IRS will entertain an offer in compromise, in which you offer to pay a negotiated percentage of the amount the IRS claims is due, if one of two grounds exist:

There is some doubt as to collectability because of some type of economic hardship, e.g., the taxpayer does not earn enough money to pay the bill;or there is some doubt as to liability, for instance, there are some legal issues outstanding. A compromise enables the taxpayer to pay less than the total tax liability due.

The compromise is sometimes to the advantage of the IRS because this enables the government to avoid the expenses and troubles of collection or litigation.

During an audit the revenue agent will not normally initiate a discussion about compromise. However, it is always permissible to initiate a conversation about entertaining an offer in compromise with a revenue agent toward the end of an audit.

I usually initiate the discussion once I have facts that will support a compromise (such as legal points concerning doubt as to liability).

However, often revenue agents are more interested in assessing the full amount rather than entertaining a compromise, so it is necessary to await the tax bill and then file a formal Offer in Compromise claim (see below).

Many times the basis for a compromise is doubt about the liability rather than inability to pay.

Most of the compromises I have handled involve taxpayers who believe they have been unfairly assessed more than their fair due of taxes.

There is no requirement the taxpayer be insolvent in order to compromise taxes; however, incapacity to pay may also form the basis of a compromise.

The most common basis for a compromise is that collection of the tax would create economic hardship or exceptional circumstances exist.

Compromises are also available in situations of possible criminal liability or fraud. The attorney general’s office must approve any compromise of criminal cases. Specific penalties are also susceptible to compromise.

Sometimes the compromise involves an agreement for the government to discharge its tax lien. This is a crucial element.

A compromise offer must be submitted on Form 656, “Offer in Compromise.” Sometimes the compromise may include an installment payment agreement.

The IRS recognizes that individuals need funds to provide for basic living expenses. If the offer of compromise is based in inability to pay, a financial statement on Form 433A must accompany the offer.

This lists your living expenses. The IRS will consider your assets, your future income, the amount collectible from third parties and assets or income outside the country.

The most favorable terms for a compromise involve an agreement to pay the compromised amount in five or fewer monthly installments. (This is called a “lump sum cash offer.”)

Expedited processing can be requested if the taxpayer has a need to resolve a tax liability by a specific date.

This sometimes is needed if the taxpayer has a pending business transaction that requires him or her, as a condition to the transaction, to resolve a tax liability.

Larger settlements (in excess of $50,000) must be approved by the chief counsel of the IRS.

The IRS can later set aside a compromise if false information or documentation was supplied with the offer or if the taxpayer concealed assets or the ability to pay.

The compromise must be accepted by authorized officials in order to become binding. An attempted informal settlement by a non-authorized official is not binding on the government.

The compromise is considered accepted when the IRS issues a written notification of acceptance.  end_mark

John Alan Cohan is a lawyer who has served the horse, livestock and farming industries since 1981. He serves clients in all 50 states, and can be reached by telephone at (310) 278-0203. His website is www.JohnAlanCohan.com

John Cohan

John Alan Cohan

Tax attorney

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