Tax season strikes fear in the hearts of many, especially those who know they will have an excessive bill due on April 15. In addition, there are many people who, for any number of reasons, may not have paid a tax liability in previous years, have not filed returns or received notice from the Internal Revenue Service that a previous year’s return had an error that led to money owed. There is hope, however, that some of the tax burden can be lessened through what the IRS calls an Offer in Compromise.
Offer in Compromise
In some cases, the IRS will accept as little as one percent of the amount owed on a tax bill from taxpayers who qualify for an Offer In Compromise. In order to qualify, the taxpayer must:
Demonstrate that collecting the tax bill is in doubt, both now and in the future. This is a process known as “doubt as to collectability.”
Provide evidence that paying the bill would be unfair, inequitable or cause economic hardship for the taxpayer.
Demonstrate that the tax liability assessed is incorrect, otherwise known as “doubt as to liability.”
In order to show an incorrect assessment, the taxpayer must file Form 656-L, and some experts say that this option is often more difficult to pursue when requesting an Offer in Compromise.
Steps to Follow
The first step in requesting an Offer in Compromise is completion of IRS Form 656, which must be filed with a $150 application fee. The fee may be waived if the taxpayer’s income is below poverty level, but they must file the Application Fee Worksheet found in the Offer in Compromise packet to qualify for the waiver.
In addition, the taxpayer must file a Collection Information Statement, From 433-A, which must be completed accurately and completely. Errors or omissions on the form could result in the Offer in Compromise being rejected. Once the form is completed, the IRS will request significant documentation, including pay stubs, bank records and more. Information provided on the forms can also provide information to the IRS about assets. If the request is denied and the agency accelerates collections, this could provide them with avenues to pursue to collect the tax debt. Therefore, an Offer in Compromise should not be filed unless the taxpayer is relatively certain it will be approved.
In 2014, the IRS announced more flexible terms to the Offer in Compromise program as part of its Fresh Start initiative. Some changes announced include:
Revising the calculation used to determine a taxpayer’s future income.
Allowing taxpayers to repay student loans, as well as state and local taxes that may be delinquent.
Expanding the Allowable Living Expense allowance category and amount
Narrowed parameters and clarification regarding dissipated assets
Discontinuing the inclusion of equity in income producing assets in the calculation to determine collection potential from businesses
When evaluating Offer in Compromise requests, the IRS uses Allowable Living Expense standards in order to provide consistency and fairness when determining collection activities. The standard has been expanded to include credit card payments, bank fees and other charges.
Other Tax Payer Relief Changes
Since 2008, lien relief has been available to taxpayers who were attempting to sell or refinance a home, and in 2009, new flexibility was added to programs for taxpayers who were facing problems paying tax bills or who were in collections. Since 2011, the IRS has allowed small businesses to resolve tax issues by allowing them to pay with installment agreements and made changes to the lien policies for those with tax burdens. The IRS has also increased the threshold for taxpayers who request an installment agreement, eliminating the need for significant financial information (http://www.irs.gov/uac/irs-announces-more-flexible-offer-in-compromise-terms-to-help-a-greater-number-of-struggling-taxpayers-make-a-fresh-start).
Television and radio programs are littered with advertisements from companies who promise they can reduce a taxpayer’s burden with the IRS, sometimes claiming they can settle for “pennies on the dollar.” The fact is that reducing taxes is a difficult, complicated procedure. In some cases, a taxpayer may be able to contact the IRS on their own and negotiate a reduction on their own. In many cases the IRS can work out installment plans if the taxpayer has the ability to pay, but interest and fees continue during the installment plan, making it difficult to get the tax burden paid off quickly. The best option when facing an income tax burden, especially one that is excessive, is to hire an experienced professional to work with the IRS on the taxpayer’s behalf as they are familiar with the process, the steps necessary and whether a particular case may be eligible for an Offer in Compromise, or another option is the better choice.
Requesting an Offer in Compromise from the IRS is a complicated, time-consuming process, which means contacting an attorney with experience in the program may be critical to approval. Contact our office today to learn how an Offer in Compromise can help you reduce your tax burden and get you the fresh start you need with the IRS.