Tax Law Insights

Where individuals and businesses owe IRS taxes, the IRS has a settlement program where it can legally accept less than what is owed. Known as an "Offer in Compromise," Congress has given the IRS the authority to "compromise" and reduce a tax debt owed to it, but only under very specific terms. The IRS does not have other programs or alternatives where it can accept less tax than what is owed - only the Offer in Compromise.

The IRS Offer in Compromise program has been in effect for many years, but the program has changed. Many individuals and businesses file their own Offers in Compromise with the IRS and without understanding the requirements for an Offer and including the unpublished policies and practices of IRS Offer in Compromise reviewers. The vast majority of Offers in Compromise are rejected by the IRS for this reason.

Generally, the IRS will not even consider an Offer in Compromise unless an individual or business has first filed all his/her/its required tax returns, and is able to prove to the IRS the individual or business is making current tax payments (employee withholdings, quarterly estimated tax payments, employer tax withholding deposits). If you have not filed all your required tax returns, and/or have not made payments to the IRS for your current-year taxes, this must be done first, or the IRS will simply send an Offer in Compromise back and move on and continue to collect all the taxes as before.

For individuals and businesses that are "current" with their tax return filings and payments, the IRS can then consider an Offer in Compromise. There are a number of different approaches to filing an Offer in Compromise with the IRS. The primary method is under a "Doubt as to Liability" standard, and where the taxpayer can demonstrate that he, she or it does not have the assets or the income with which to currently pay all the taxes. For this purpose, the IRS will evaluate whether the taxpayer has sufficient "net equity" in assets to pay all the taxes; if so, the Offer will be rejected. Also, the IRS will consider whether the taxpayer can fully pay-off the tax debt through a payment plan; if so, again the Offer will be rejected.

If the taxpayer can finally get over all these hurdles, the IRS will consider accepting an Offer in Compromise payment - less than what is due from the taxpayer - by evaluating the taxpayer's equity in assets together with an amount representing 12-24 months of the taxpayer's net income. Asset valuations and required income and expenses used to evaluate monthly "net income" can and often should be negotiated with the IRS. The IRS does not tell this to taxpayers.

Individuals and businesses that wish to reduce their taxes owed to the IRS should consider an Offer in Compromise, but should always consult with a professional tax advisor to fully understand the program, what it can provide, and especially its limits.