Many individuals with tax debt want to settle their liability with the IRS for less than the amount owed. This tax resolution concept is known as an offer in compromise. At base, the taxpayer submits an offer to the IRS for less than the total amount owed. However, offers in compromise can only be submitted on certain grounds. Those grounds are when there is doubt as to collectibility, doubt as to liability, and when an offer in compromise will promote effective tax administration. While most offers are submitted on the basis of doubt as to collectibility, some offers qualify for effective tax administration when IRS collection would cause economic hardship or be otherwise inequitable.
Public Policy & Equity
The United States Treasury Regulation governing offers in compromise recognizes that offers in compromise can promote effective tax administration when IRS collection would be inequitable. This “fairness” basis for offers in compromise is born out of the recognition that at times there are exceptional circumstances in which collection of the full liability would undermine public confidence that tax laws are being applied fairly. For instance, if a taxpayer was in a coma for a number of years and thus failed to file tax returns, and the IRS later filed a substituted return and assessed a tax deficiency with interest and penalties, an offer in compromise may promote effective tax administration as the collection of interest and penalties would be inequitable, especially if the taxpayer’s history demonstrates compliance with tax filing and payment. Likewise, if a taxpayer incurred tax liability due to erroneous IRS advice, the taxpayer may have grounds for an offer in compromise based on effective tax administration.
Many individuals with tax debt have some degree of economic hardship, but the economic hardship that can qualify a taxpayer for an offer in compromise is narrowly defined. In brief, the IRS may accept an offer in compromise on the basis of effective tax administration if the IRS could secure full repayment of the tax liability, but doing so would cause the taxpayer “economic hardship” akin to the following 3 circumstances:
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 certain 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 certain 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.26 CFR § 301.7122-1 – Compromises
One example of a situation that would satisfy the economic hardship criteria is a retired taxpayer on a moderate fixed income with a retirement account. If the IRS could secure full repayment by liquidating the retirement account, but doing so would leave the taxpayer unable to pay for basic living expenses, and the taxpayer has a history of compliance with tax laws, an offer in compromise may promote effective tax administration due to economic hardship.
Free Consultation With A Tax Attorney
To learn more about your ability to file an offer in compromise based on effective tax administration call Sacramento tax attorney Jin Kim at (916) 299-9913 and schedule a free consultation. There are distinct advantages and disadvantages to offers in compromise, so it’s important that you understand whether this tax resolution strategy best fits your situation.
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