Paying the IRS--Offers in Compromise

Businesses that encounter individuals or other businesses who can't pay what they owe or who dispute the liability often will compromise. They figure they are better off getting something now rather than holding out for a bigger payment that may never materialize. Well, the IRS thinks the same way. Through its offer in compromise program, it may be willing to accept a lesser payment than it claims is owed.

If you decide to make an offer and the IRS accepts, you end up paying the lesser amount in full satisfaction of your tax liability. The IRS cannot collect the additional tax from you. It can accept an offer only if there is doubt whether the tax liability exists or doubt whether the tax can be collected. A doubt as to liability must be supported by legally sufficient evidence and authority. A doubt as to collectibility must be supported by a Collection Information Statement (IRS Forms 433-A or B) which requires disclosure of a taxpayer's assets. The offer in compromise itself is made on a separate form.

Many more taxpayers began to make offers in compromise primarily because the IRS lowered its standards for determining the minimum acceptable amount of a compromise offer. Before 1992, offers had to reflect the taxpayer's maximum ability to pay. Then the IRS accepted offers that reasonably reflected collection potential. Now, however, the IRS has stepped back somewhat and has come up with some pretty tough guidelines for determining that. As a result it's important to plan properly before making an offer.

The IRS Restructuring and Reform Act of 1998 adds to the likelihood that a taxpayer can make an acceptable and fair offer in compromise. The new law requires the IRS to develop employee guidelines for determining whether a proposed offer in compromise is adequate and should be accepted to resolve a dispute. These guidelines must include consistent application of national and local allowances under which IRS employees may determine the basic living expenses of a taxpayer entering into a compromise. Moreover, the new law now prohibits an IRS agent from rejecting an offer from a low-income employee solely on the basis of the amount of the offer.

A preliminary consideration for someone making an offer is whether to use assets to make estimated tax payments that are due rather than holding the assets to increase an offer. This is because the IRS cannot accept an offer in compromise if tax returns are not current or if tax liabilities aren't being paid as they accrue.

Of course there are some disadvantages to making an offer. For example, you make it easier for the IRS to identify property that it can seize and levy upon (although the 1998 legislation prohibits the IRS from levying against property while a compromise offer is pending). Further, the offer usually operates to extend the statute of limitations. Still, in severe situations, the offer in compromise route may be the only way to go.

We can figure what amount to offer and explain how to go about doing it. Please do not hesitate to call if we can assist you.