An offer of compromise can allow taxpayers to pay less than the IRS alleges they owe. It is extremely common to resolve tax debt matters in this manner. But an offer in compromise is only one particular manner for the discharging of tax debt.
There are certain situations where making an offer in compromise to the IRS makes total sense. Sometimes taxpayers are facing financial hardship that makes paying off taxes owed difficult. This can mean that accounts are in what’s called Currently Not Collectible status. There may also be certain circumstances where there is doubt as to the taxpayer being liable for the debt.
Tax debt that would be difficult to collect
Taxpayers most often submit an office in compromise to the IRS under circumstances where taxpayers would face hardship in paying back the debt. In such instances, the taxpayer generally requests to pay less than what they owe.
However, prior to the IRS accepting such an offer in compromise, there must be an evaluation of the taxpayer’s financial circumstances. There will need to be an analysis of a taxpayer’s assets, liability, wages and expenses. The IRS will attempt to establish a “reasonable collection potential (RCP).” This would be an amount that the IRS could reasonably believe they would collect if taking the matter through the litigation process.
The IRS will not automatically accept such an offer in compromise – especially if the agency has the ability to collect the taxes through other means. Those other means can include various agency collection efforts.
Tax debt that one should not have to pay
There are circumstances when the IRS is wrong on how much one owes. The taxpayer may owe less, or they may owe nothing at all. In such cases, a taxpayer may then offer an offer in compromise. It does not matter whether the taxpayer can or cannot pay the debt in these circumstances.
Such cases may hinge upon a disagreement of the law or disagreement regarding the amount owed. Through an offer in compromise, the taxpayer and the IRS may then negotiate regarding what the taxpayer actually owes.
It’s useful to have legal advice from an experienced tax attorney explain the likely outcome regarding an offer in compromise. Understanding all of your options in advance can lead to you making the right choices.