The IRS has the authority to compromise any civil or criminal tax liability before the case has been referred to the Justice Department for prosecution or defense. The vast majority of offer in compromise are submitted during the collection process, by taxpayers who are experiencing financial difficulty which creates doubt as to collectibility.
The IRS has complete discretion whether or not to enter into a compromise, and will entertain an offer in compromise based upon one or more of the following grounds:
Doubt as to liability – The taxpayer disputes the existence or amount of the correct tax liability
Offer in compromise based on doubt as to liability are generally summarily rejected because the tax is believed to be correct as assessed by the IRS at the outset of the offer in compromise process.
Doubt as to Collectibility – The taxpayer is unable to pay the liability in full based upon the value of his or her assets and income
Where a taxpayer in unable to pay their tax liability in full, they should consider submitting a Doubt as to Collectibility offer. Factors that support making an offer under this basis include: advanced age, serious illness from which recovery is unlikely, or any other factors that have an impact upon the taxpayer’s ability to pay the amounts due the IRS and at the same time continue to provide for the necessary living expenses for the Taxpayer and his or her family. The IRS will generally only consider a Doubt as to Collectibility offer when the taxpayer is unable to pay their taxes in full by liquidating assets and where the taxpayer fails to qualify under current installment agreement guidelines.
An Offer in Compromise based on Doubt as to Collectibility must reflect the taxpayer’s reasonable collection potential (RCP). RCP is the amount that the IRS can collect from all available means, including administrative and judicial collection remedies. Absent special circumstances, an offer in compromise based on doubt as to collectibility will be rejected if the taxpayer’s RCP is greater than the outstanding tax liability.
The link below is a tool on the IRS website that will help determine if you are eligible for an Offer in Compromise:
The amount offered cannot include any refunds due the taxpayer or amounts that have previously been paid or amounts attached by a notice of levy.
The $186 application fee will not be refunded if an offer is withdrawn, rejected, or returned as unprocessable after acceptance for processing
Effective tax administration – Collection of the full amount of unpaid tax liability would cause the taxpayer economic hardship or based upon other compelling public policy or equity considerations
There are two types of effective tax administration offers: those based on economic hardship and those based upon equity or public policy.
An effective tax administration offer based upon hardship may be accepted if the IRS determines that, although collection of the full liability could be achieved, it would cause the taxpayer economic hardship. Economic hardship exists when payment of the tax will cause an individual taxpayer to be unable to pay his reasonable basic living expenses.
Factors that support a determination of economic hardship include:
Taxpayer is incapable of earning a living because of a long term illness, medical condition or disability and it is reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition;
Although taxpayer has some monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and
Although taxpayer has some assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.
Factors supporting a determination by the IRS that accepting a compromise would undermine compliance by other taxpayers with the tax laws include, but are not limited to:
whether the taxpayer has a history of noncompliance with the filing and payment requirements of the tax laws;
whether the taxpayer has taken deliberate actions to avoid the payment of taxes; and
whether the taxpayer has encouraged others to refuse to comply with the tax laws.
Other factors that may be examined include the cause of delinquency, the length of noncompliance and efforts to resolve the noncompliance. The IRS generally reviews the last three to five years for compliance.
The IRS will not accept an effective tax administration offer in compromise based on public policy or equity considerations when the basis for the offer is that the imposition of a particular tax law provision is unjust or inequitable.