There are many websites and radio advertisements that offer services to help “compromise” Internal Revenue Service (IRS) tax bills. Many of these offers make dubious claims, and can entail upfront costs that exceed the results produced. Some of these promoters advertise that they can settle your tax debt for “pennies on the dollar,” which is a false and misleading claim.
If you receive a tax bill from the IRS – after an audit, for example, or if you have entered into an agreement to settle a tax dispute with the auditor, IRS Appeals or the U.S. Tax Court – it is still possible to further compromise the amount due. This can be accomplished through the IRS Offers in Compromise procedure. If a large amount is at stake, it’s advisable to have a tax attorney assist you.
The IRS will entertain an offer in compromise, in which you offer to pay a negotiated percentage of the amount that the IRS claims is due, if one of two grounds exist:
- There is some doubt as to collectibility because of some type of economic hardship, e.g., the taxpayer does not earn enough money to pay the bill;
- There is some doubt as to liability; for instance, there are some legal issues outstanding.
During an audit, the revenue agent won’t normally initiate a discussion about compromise. However, it’s always permissible to initiate a conversation about entertaining an offer in compromise with a revenue agent toward the end of an audit. I usually initiate the discussion once I have facts that will support a compromise (such as legal points concerning doubt as to liability). However, often revenue agents are more interested in assessing the full amount rather than entertaining a compromise, so it’s necessary to await the tax bill and then file a formal “Offer in Compromise” claim.
Many times, the basis for a compromise is doubt about the liability rather than inability to pay. Most of the compromises I’ve handled involve taxpayers who believe they’ve been unfairly assessed more than their fair due of taxes. There is no requirement that the taxpayer be insolvent in order to compromise taxes; however, incapacity to pay may also form the basis of a compromise.
The most common basis for a compromise is that collection of the tax would create economic hardship, or that exceptional circumstances exist. Compromises are also available in situations of possible criminal liability or fraud. The Attorney General’s office must approve any compromise of criminal cases. Specific penalties are also susceptible to compromise.
Sometimes, the compromise involves an agreement for the government to discharge its tax lien. This is a crucial element.
A compromise offer must be submitted on Form 656, “Offer in Compromise.” Sometimes the compromise may include an installment payment agreement.
The IRS recognizes that individuals need funds to provide for basic living expenses. If the offer of compromise is based in inability to pay, a financial statement on Form 433A must accompany the offer. This lists your living expenses. The IRS will consider your assets, your future income, the amount collectible from third parties, and assets or income that are outside the country.
The most favorable terms for a compromise involve an agreement to pay the compromised amount in five or fewer monthly installments. (This is called a “lump sum cash offer.”)
Expedited processing can be requested if the taxpayer has a need to resolve a tax liability by a specific date. This sometimes is needed if the taxpayer has a pending business transaction that requires him or her, as a condition to the transaction, to resolve a tax liability.
Larger settlements (in excess of $50,000) must be approved by the Chief Counsel of the IRS. The IRS can later set aside a compromise if false information or documentation was supplied with the offer, or if the taxpayer concealed assets or the ability to pay.
The compromise must be accepted by authorized officials in order to become binding. An attempted informal settlement by a non-authorized official is not binding on the government. The compromise is considered accepted when the IRS issues a written notification of acceptance.
-- John Alan Cohan (www.JohnAlanCohan.com) is a lawyer who has served the horse, livestock and farming industries since 1981. Reach him at 310-278-0203 or [email protected].