Offers in Compromise
If you want to compromise your taxes with the IRS, there are three types of offers: Doubt as to Collectibility, Doubt as to Liability, and Effective Tax Administration (ETA) (economic hardship and public policy or equity grounds). This Doubt as to Collectibility and ETA offers.
Doubt as to CollectibilityAn Offer in Compromise (an “OIC”) may allow you to resolve your IRS debts for an amount less than you owe. To qualify for an OIC, you must show the IRS that there is some doubt as to whether the IRS will ever be able to collect the tax bill from you now or in the foreseeable future. This is an offer based on “doubt as to collectibility.” An offer based on doubt as to collectibility begins with a math exercise. The IRS takes into consideration your income and your assets to determine the “reasonable collection potential” which means how much the IRS could take from your income while still leaving you with enough left over to meet basic living expenses, plus what the IRS could recover if it began seizing and selling all of your assets.
Not surprisingly, the amount that the IRS thinks that it could collect from you is usually much higher than the amount that most people think that they can reasonably pay. The IRS offers a free tool online (there is a link below) that will give you a ROUGH idea whether you might qualify. Bear in mind though that just because the online tool says that you qualify does not mean that an offer will automatically be accepted, and just because the tool says that you do not qualify does not mean that you have no chance of compromising your taxes.
If you are interested in pursuing an offer based on doubt as to collectibility, we recommend that you begin immediately tracking your income and all of your expenses very closely. Consider using a program or app to track and categorize your monthly expenses. Alternatively, track your expenses on a spreadsheet or some other method that will help us to show the IRS where you money goes each month. Keep documentation to back up those expenses. Knowing the rules and the extent of the IRS’s flexibility on these issues is crucial to obtaining the best possible result. We will work with you to present your financial information in the best possible light, and to thus increase the chances of successfully compromising your tax debts.
How you document your income and expenses, and how you present that information to the IRS will have a big impact on the likelihood that the IRS will accept your offer.
Effective Tax AdministrationThe IRS can only consider an offer based on effective tax administration (“ETA”) after it has first evaluated whether the offer should be considered under the Doubt as to Collectibility or Doubt as to Liability. Effective Tax Administration is essentially the “backstop” that ensures that taxes are being administered fairly across all taxpayers. An ETA offer may be appropriate where the math shows that the taxpayer can pay the tax debt in full over time, but there is some extraordinary reason why the IRS should accept less than full payment. There are two types: economic hardship and public policy or equitable grounds.
Paying taxes is an economic hardship for pretty much everyone. Simply because full payment will be burdensome or even require major lifestyle changes does not mean that full payment meets the IRS requirement of economic hardship.
The definition of economic hardship is derived from the tax regulations and means that the taxpayer is unable to pay reasonable basic living expenses. Because economic hardship is defined as the inability to meet reasonable basic living expenses, it applies only to individuals (including sole proprietors) but is not available to corporations, estates, or other non-individual entities.
The IRS provides an example of what it would consider to be an economic hardship:
The taxpayer is disabled and lives on a fixed income that will not permit full payment of the taxes under an installment agreement. The taxpayer also owns a modest house that has been specially equipped to accommodate a disability. The equity in the house is more than the tax liability, however, the taxpayer has been unable to borrow against the house. In addition, because the home has been specially equipped to accommodate the disability, a forced sale of the home would be particularly harsh.
Public Policy or Equity Grounds
In addition to an economic hardship, the IRS may consider public policy or equity grounds. We were involved in a situation where the taxpayer was one of dozens of businesses that hired a payroll processing company to file payroll tax returns and pay payroll taxes as scheduled. The taxpayer saw that the payroll company was making the correct withdrawals from the business account and that the payroll returns were correct. However, unbeknownst to the business, the payroll company was a scam. It never made the payroll tax payments. Instead, the individuals behind the payroll company stole the money from all of its customers and fled the country leaving the businesses on the hook for the unpaid taxes. The IRS determined that since the business took reasonable efforts to be diligent about meeting its tax obligations and was the victim of a crime, fairness and equity demanded that the IRS agree to work out a compromise with the business and forgive most of the outstanding tax liability.
The IRS may also consider public policy or equity grounds where the taxpayer relied on bad advice from the IRS. Conceptually, ETA offers may be appropriate where the tax debt arises despite the taxpayer’s good faith efforts to stay in compliance.