Offer in compromise – can I pay less tax than I owe?

Your Guide to State, Local, Federal, Estate + International Taxation

offer in compromise, tax, liability, debt

I’ve heard the ads on the radio about the IRS offer in compromise program. It really sounds like a great program for taxpayers who have outstanding tax liabilities and just simply cannot pay them. In fact, it sounds like an incredible opportunity to pay less than what the tax debt actually is and have the IRS agree to it. Maybe it’s the current political climate but the last time I heard the ad I wanted to do a little fact checking of my own.

Maybe you are asking yourself right now – what is an offer in compromise? Simply put, an offer in compromise allows you to settle your tax debt for less than the full amount you owe. The program was designed to assist eligible taxpayers in paying off their tax debt and getting a fresh start. It is a compromise between the taxpayer and the IRS.

The IRS has a pre-qualifier tool on its website that assists the taxpayer in determining whether they qualify as an offer in compromise candidate. To apply you must have filed all tax returns you were legally required to file; received a bill for at least one tax debt included in your offer; made all required estimated tax payments for the current year and if an employer, made all required federal tax deposits for the current quarter. If these criteria are not met the offer will be returned. Bankruptcy status also eliminates a taxpayer from the offer in compromise program.

To qualify for the offer in compromise, the taxpayer must prove that the balance of tax owed cannot be paid before the collection statute expires using their net equity in assets plus any future income. Future income as calculated by the IRS is the monthly disposable income it can collect before the collection statute expires. The normal collection statute is ten years after the assessment of the tax liability. This period can be extended by certain events. Once the qualification standard has been met, an offer amount is determined. The taxpayer must be able to pay the offer amount either as a lump sum or periodic payments, generally within a 6 to 24 month period.

Which leads me to how easy are these to get approved by the IRS? In the 2014 fiscal year, the IRS received 66,155 offers and accepted 26,924. This represented a decrease of approximately 13% from the number of offers that were accepted in fiscal year 2013. The IRS statistics indicate that taxpayers with outstanding balances who submit an offer in compromise are unlikely to have it accepted.

The IRS Fresh Start Initiative did provide struggling taxpayers with some hope by allowing for lower offer amounts and less stringent qualification criteria. The National Taxpayer Advocate is a strong advocate for changes that would help to facilitate the use of the offer in compromise program by the IRS. However, at this date it remains to be seen if the agency will receive funding to implement the changes recommended.

My fact checking indicated that the process wasn’t quite as easy and carefree as the voice on the radio seemed to be leading me to believe. If you are considering an offer in compromise, you can obtain the Form 656 booklet from the IRS website which walks you through the steps in the process and paperwork that will need to be submitted. This can be a complicated process and one in which due diligence and great care should be exercised. Consultation with a professional who is versed in the area is always a prudent decision.

Cheryl Dickerson, CPA