Paying Your Tax Debt to the IRS: "Offers in Compromise"

Dennis M. Haase, Esq.  writes: If you owe back taxes, the IRS may let you settle your tax debt for less than the amount you owe if you can’t pay the full amount due or if paying the amount due would create a financial hardship for you. This is known as the IRS Offer In Compromise program.

Additionally, as part of this program, the IRS in May of 2012 unveiled the Fresh Start initiative to make it easier for individual and small business taxpayers to pay back taxes and avoid tax liens. The Fresh Start initiative gives the IRS greater flexibility in considering your ability to pay and greater flexibility in determining the equity in your assets and determining your allowable living expenses, all of which are used by the IRS to evaluate your offer in compromise and improve your chances of having your offer accepted by the IRS.

For example, in the past the IRS looked at four years of your future income to determine your ability to pay your delinquent taxes. Under the Fresh Start initiative, the IRS will now look at only one year of future income for offers that will be paid in five or fewer installments. The IRS will look at only two years of future income for offers that will be paid in six to 24 months.

In addition, the IRS, in determining your ability to pay, allows other monthly expenses in addition to your living expenses to be claimed, such as amounts to repay student loans and delinquent state and local taxes.

The IRS will accept a taxpayer’s offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential, or when special circumstances exist. More specifically, the IRS will compromise liabilities when:

1. there is a doubt as to the existence or amount of the tax liability;
2. there is doubt that the total amount due can be collected; or
3. there is no doubt as to the liability or as to collectibility, but compromise would promote effective tax administration because either collection of the liability would create economic hardship, or compelling public policy or equity considerations provide a sufficient basis for compromising the liability.

An additional benefit of the Offer in Compromise is that while the IRS is considering your offer, the IRS is legally prohibited from seizing your assets or your wages. This is an excellent opportunity for those who are burdened with the federal tax debts to enter into the Offer In Compromise program to reduce and eliminate their outstanding taxes, interest and penalties owed to the IRS.