Offers in Compromise / Tax Settlements

This IRS tax debt settlement program was developed by Congress to help taxpayers in financial hardship obtain a fresh start with the tax collector.  From the IRS’ perspective, this settlement program has also collected large amounts of outstanding tax in relatively short periods of time – taxes that might otherwise have gone uncollected.

The program operates under the theory that taxpayers experiencing a serious financial hardship should be allowed a one-time opportunity to eliminate their debt, sometimes for a fraction of what was originally owed, helping taxpayers make a new beginning and also helping the IRS close many costly collection cases.

While the program has been and continues to be modified, it remains the most effective means for both taxpayers and IRS to bring permanent resolution to tax collection problems.

An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax debt.

The IRS has the authority to settle, or “compromise,”  federal tax liabilities by accepting less than full amount due under certain circumstances.

A tax debt can be legally compromised for one of the following reasons:

• Doubt as to Liability – Doubt exists that the assessed tax is correct.  Stated differently — “I don’t believe I legally owe the tax”

• Doubt as to Collectability – Doubt exists that you could ever pay the full amount of tax owed.  Stated differently — “I acknowledge that I owe the tax, but it is very unlikely that I will be able to pay the tax due in full, given my current and projected financial situation”

• Effective Tax Administration – There is no doubt the tax is correct, and no doubt that the amount owed could be collected if the IRS were to seize and sell assets, but an exceptional circumstance exists that may allow the IRS to consider a taxpayer’s settlement offer. To be eligible for a compromise on this basis, the taxpayer must demonstrate that collection of the tax would create a severe and irreparable economic hardship; or, collection of the tax would be unfair / inequitable.  Stated differently, for example – “My wife and I could only pay the tax in full if we were forced to sell our home.  We are retired, live on Social Security Income and have no hope of ever paying the tax.  A forced sale of our home would put us out on the street. If that were to occur, we could not afford to rent and still survive on our limited income. Please accept our settlement offer without looking at our home as an asset that should be sold.”

Qualifying for this program seems deceptively straightforward: when there is a financial hardship and the amount your owe exceeds your ability to realistically pay off the debt in five years, and your assets are insufficient to pay off the total debt, the IRS is willing to settle for less than the full amount it is owed.  Sounds simple, but the process and required documentation is intensive and can last from 6 to 12 months, plus another 6 months if you appeal a negative decision.

The end result is usually a “Win-Win” –  meaning, a qualified taxpayer can settles for less than what is owed, and the IRS, in turn, ends their costly collection process and gets a compliant taxpayer from that point forward.

If you consider a nationwide average, according to statistics reviewed by the IRS Taxpayer Advocate’s Office, for Offers in Compromise accepted between 2000 to 2005, the IRS settled the average case for approximately 16 cents on the dollar.

But, do not be deceived by what sounds too good to be true.  The 16 cent figure is an average. Each case is evaluated on its own facts and merits.  Some people settles for 2 cents on the dollar and others for 75 cents on the dollar, and anything in between.

Because of the popularity of the program, however, millions of frivolous cases were submitted, bottle-necking the process. Now, each case is scrutinized and examined to the dollar. A small miscalculation and the amount required to be offered could skyrocket; or, even worse, the amount offered could be rejected altogether.

Thankfully, our staff members have years of experience and know the intricacies of the program. Because we are intimately familiar with formulas and guidelines used by the IRS, we are able to assess the lowest possible amount the IRS will accept before the settlement offer is submitted, thus eliminating  guesswork and worry.

Your assigned tax professional will walk you through the procedure, answering your questions and providing an accurate assessment of your case.