Offers in Compromise
An Offer in Compromise is a way to pay the IRS less than the full amount owed. The idea is that if the IRS believes it's chance of collecting the full amount of the liability is doubtful, they are better off accepting an Offer in Compromise than nothing at all. The above is known as Doubt as to Collectibility. The other circumstance that an Offer in Compromise will be accepted is if the taxpayer can convince the IRS that there is a legitimate Doubt as to Liability that the tax is legally not owed.
A significant amount of documentation must be filed with the Offer in Compromise in a Doubt as to Collectibility case because the IRS wants to see proof that the taxpayer cannot pay the full amount and it is doubtful they will be able to pay within the ten year Statute of Limitations. Included in the submitted documentation will be the determination of the fair market value of all assets, less any liens that have priority over an IRS lien, like a home mortgage for example. For purposes of an Offer in Compromise, the IRS will value illiquid assets at 80% knowing that less value can be had on a quick sale of an illiquid asset, like a house. Stocks and bonds are valued at 80% and retirement accounts at 70%.
After determining the value of all of the taxpayer's current assets, an attempt is made to valuate future income. This is done by taking the taxpayer’s monthly gross income minus monthly expenses which equals the Remaining Monthly Income. The Remaining Monthly Income is then multiplied by either a factor of 12 or 24 depending on whether the taxpayer plans on paying the liability over 12 or 24 months instead of up-front.
In the case of an up-front cash Offer in Compromise, a non-refundable payment of $150 plus 20% of the offer must be submitted along with the Offer of Compromise. If the offer is accepted, the remaining 80% of the offer amount must be paid within five months from the date of acceptance. Of important note is that the filing fee and the 20% down payment are non-refundable whether the IRS accepts or rejects the offer (though the 20% payment is applied to the outstanding liability).
If choosing to pay over a period of one or two years, the taxpayer must include with the first month's payment with the Offer in Compromise and the taxpayer must keep making the monthly payments while the IRS is considering the offer. If the taxpayer fails to make the payments, the offer is no longer valid.
Another important note to be made is that if the IRS accepts an offer, the taxpayer must remain compliant with any tax return filing and tax paying obligations for a minimum of five years, otherwise, the unpaid amount of the original liability will be owed again.
Please be wary of firms advertising that taxpayers need only "Pay only pennies on the dollar". The IRS has issued a consumer alert regarding this practice and you should talk to an experienced tax professional like those at Datta Law Group before negotiating with the IRS.
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