When a person owes substantial tax liabilities to the IRS, he or she may feel paralyzed with worry and a offer in compromise may be helpful. However, the IRS has a program that could allow the individual to settle the tax debt for less than is owed or, in some rare situations, eliminate the debt completely.
Essentially, the IRS Offer In Compromise program is for individuals who cannot afford to pay the tax liabilities that they owe and doing so would create a financial hardship.
To determine whether an individual qualifies for an Offer In Compromise, the IRS evaluates the person’s ability to pay, income, expenses and asset equity. On its website, the IRS cautions that other payment options should be explored before an offer is submitted.
There are three basic grounds on which the IRS may accept an Offer In Compromise:
Doubt as to liability. This ground can only be met when there is a genuine dispute as to whether the tax liability was correctly assessed and is actually owed.
Doubt as to collectability. This ground exists when the full amount of the tax liability is greater than a taxpayer’s assets and income.
Other exceptional circumstances. This ground can be permitted when the tax liability is legitimate but paying the amount in full would 1) create an economic hardship for the taxpayer or 2) would be unfair and inequitable due to exceptional circumstances.
In addition to being offered at the federal level, the state of New York also has a Offer In Compromise program for individuals who have outstanding state tax debt.
Deciding to make an Offer to the state or IRS offer in Compromise is an extremely important decision and the process is very complicated, which is why it’s vital to work with an experienced tax attorney.
Source: IRS.gov, “Offer in Compromise,” May 6, 2014
