Offers in Compromise
If your tax debt has become an unmanageable financial burden, it may be possible to reduce the amount you owe by filing an offer in compromise. Qualification depends on your financial condition and ability to pay. Generally, an offer in compromise requires extensive documentation to support financial information provided in a two-part formula. The formula includes (1) equity in assets (some are given a liquidation discount) and (2) disposable monthly income over a one- or two-year period, depending on the circumstances. To be accepted, the offer must be equal to or greater than the amount generated by this formula. Due to the complexity and the amount of documentation involved, it may become necessary to hire a competent tax attorney who is familiar with all aspects of your offer in compromise.
There are three types of offers in compromise: doubt as to collectability, doubt as to liability, and exceptional circumstances.
Doubt as to Collectability
An offer will be considered if there is a reasonable doubt that the taxpayer will ever be able to pay the full amount of tax due. An example is where a taxpayer owes money from a previously successful business venture, but is currently unemployed and has few assets.
Doubt as to Liability
Doubt as to liability will be considered if there is a legitimate doubt that the assessed tax liability is correct and owed. For example, the IRS issued a taxpayer a 90-day letter that went unanswered. When this occurred, the IRS assessed tax, penalties, and interest based on the information it had available, and it was too late for the taxpayer to go to Tax Court. If the taxpayer could have provided evidence that the tax assessed was too high, an offer in compromise based on doubt as to liability might have been appropriate.
Effective Tax Administration
Generally speaking, an offer in compromise based on effective tax administration means that exceptional circumstances exist which would allow the IRS to consider an offer, even though the tax liability is correct, and the taxpayer is able to pay the liability in full. In order to be eligible for this type of relief, a taxpayer must show that collection of the tax would create an economic hardship, and would be unfair or inequitable. Examples include a person with disabilities who has significant ongoing medical expenses, or a family who cares for a child with developmental delays.
Is an Offer in Compromise Right for You?
Before submitting an offer in compromise, you should consider whether it is the best alternative for resolving your tax debt, and consider any potential negative consequences, such as extending the collection statute. Many people impulsively seek to submit an offer after hearing a radio or television commercial promising to settle their tax debt for pennies on the dollar. While this is sometimes true, it generally requires little income, few assets, and a lot of tax debt. There may be better options available based on your unique circumstances, including the amount of tax due, how old the tax debt is, how much income you are making now and in the future, your living situation, the amount of time left on the collection statute, and more. It is advisable to consult with a tax attorney to help you determine the best way to resolve your tax debt.
Contact an Experienced Attorney in the Sacramento Area
To discuss if an offer in compromise is right for your situation – or if there is a better alternative – we encourage you to contact a tax attorney from the NewPoint Law Group, LLP. To schedule a free consultation, call us at 800-358-0305 or contact us online today.