Sometimes people in tax debt wonder why the IRS would even accept an offer in compromise. After all, the IRS can garnish wages, levy bank accounts, and record tax liens for as long as it takes to collect back taxes. With such power, why should the IRS accept less than the amount owed through an offer in compromise? The answer lies in the government’s interest in collecting what it likely can at minimal expense. (And maybe a small factor is the government trying to help taxpayers get a fresh start and become tax compliant).
Collection Potential At Minimal Expense
It costs money to collect debts. That’s a lesson every experienced creditor understands all too well. From the creditor’s perspective, it costs money to make collection calls, send demand letters, file lawsuits, garnish wages, and levy bank accounts. Simply put, it’s one thing to be legally owed money, and it’s another to actually collect the amount owed. In recognition of that reality, the offer in compromise was borne out of the pragmatic reality that as long as the taxpayer’s offer aligns with what the IRS could reasonably collect, accepting that offer would secure the government what it would likely collect without additional expense.
Doubt As To Collectibility
A critical assumption to this policy underlying the offer in compromise is that there is doubt as to the IRS’s ability to collect the entire amount owed from the taxpayer. Therefore, it’s evident why most offers in compromise are based upon the “doubt as to collectibility” criteria for eligibility.
Give The Taxpayer A Fresh Start & Enhance Taxpayer Compliance
A secondary policy underlying the creation of the offer in compromise is to give the taxpayer a fresh start and encourage their future compliance with tax filing and payment. Without the offer in compromise, taxpayers could be subject to the uncomfortable process of IRS collections. Repeated bank levies, wage garnishment, and offset tax refunds can put taxpayers in a financial corner and incentivize evading collection by any means possible. To avoid that creditor-debtor dynamic and thereby enhance effective tax administration, an offer in compromise helps the taxpayer and government achieve a resolution that’s in both their interests. With their tax liability resolved, the taxpayer has received a “fresh start” and has every incentive to timely file tax returns and pay future tax liabilities.
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