IMany taxpayers are finding it difficult or impossible to pay their tax liabilities. In many cases, their tax liabilities are growing quickly as interest and penalties accrue. Ultimately, the IRS will attempt to levy their assets or garnish their wages. In certain situations, however, the IRS may agree to substantially reduce a taxpayer’s tax debt. Taxpayers may submit an “Offer in Compromise” to the Internal Revenue Service seeking to have their tax liability (including penalties and interest) reduced.
Generally, the IRS will not accept a proposed decrease in tax liability if it concludes that it can reasonably collect the full amount of the tax liability. In order for the Internal Revenue Service to make this determination, it requires that the taxpayer seeking the Offer in Compromise submit financial statements showing assets, liabilities, income and expenses. The IRS also considers the taxpayer’s potential for future income and allows for certain basic living expenses in determining the reasonableness of an Offer in Compromise. If the IRS concludes that the reasonable collection potential for a certain tax liability is greater than the amount offered, it will reject the Offer in Compromise.
The IRS may accept an Offer in Compromise on three grounds:
- Doubt as to collectability. If it is doubtful that the taxpayer could ever pay the full tax liability owed within the remainder of the statutory period for collection, then the IRS is likely to allow the taxpayer to pay a lower amount in full satisfaction of the tax liability.
- Doubt as to liability. If there is a reasonable possibility that the assessed tax liability is not accurate, the IRS may agree to accept a lower amount. For example, if the taxpayer can establish that the IRS has made an error or the taxpayer has new evidence in favor of its position, the IRS will consider these facts.
- Exceptional circumstances. Even if there is no doubt that the assessed tax is correct and there is potential to collect the full amount of the tax owed, in certain exceptional circumstances the IRS will still consider an Offer in Compromise. In order to obtain an Offer in Compromise due to exceptional circumstances, the taxpayer must establish that the collection of the tax would create an economic hardship or would be unfair and inequitable.
In certain instances, if the Internal Revenue Service rejects an Offer in Compromise, it may propose a higher settlement figure. For taxpayers facing significant tax liability, an Offer in Compromise may provide much needed financial relief. Although the criteria are somewhat different, similar tax relief is also available from the Franchise Tax Board and Board of Equalization. To schedule a consultation to explore the possibility of seeking an Offer in Compromise, please contact Troy Kingshaven, Esq. at (831) 373-1241.
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