There are three grounds for an offer in compromise: (1) doubt as to liability, (2) doubt as to collectibility, and (3) to promote effective tax administration. The vast majority of offers in compromise are submitted on the basis of doubt as to collectibility. Doubt as to collectibility means that the taxpayer’s income and assets are less than the full amount of the tax liability.
When An Offer Based On Doubt As To Collectibility is Justified
Some taxpayers are under the mistaken impression that the amount proposed in an offer in compromise is a function of negotiation; the taxpayer throws out a figure and the IRS counteroffers, and negotiations proceed from there until the tax liability is settled for less than the amount owed. In reality, the proposed figure in an offer in compromise based on doubt as to collectibility must align with the amount the IRS could collect via collections. That amount is referred to as the “reasonable collection potential” as it represents the amount the IRS could force the taxpayer to pay while leaving the taxpayer with sufficient funds for basic living expenses.
Filing An Offer In Compromise
To submit an offer in compromise based on doubt as to collectibility the taxpayer will need to complete Form 433-A which contains a financial analysis of assets, income, and expenses. Again, if the basis for the offer in compromise is doubt as to collectibility, the information contained entered in Form 433-A should evidence that income and assets are less than the total amount of the tax liability. In addition to Form 433-A, the taxpayer will need to complete Form 656. Lastly, if the taxpayer is a sole proprietor they will need to complete Form 433-B.
Filing an offer in compromise isn’t free. The taxpayer will have to pay for the offer in compromise in full or through installments. Moreover, tax attorneys charge several thousand dollars to file an offer in compromise application.
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