What Is an Offer in Compromise?
on Dec 20 in Uncategorized tagged by admin
Definition of the term “offer in compromise”
“The IRS has a program called the offer in compromise which is an agreement between the taxpayer and the government that settles tax liability for payment of less than the full amount owed.” http://www.irs.gov/businesses/small/article/0,,id=104593,00.html
Why is the government willing to settle for less than the full amount of the tax?
“The IRS will generally accept an Offer when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. “http://www.irs.gov/businesses/small/article/0,,id=104593,00.html
The government understands that there are certain circumstances in which the taxpayer cannot repay the full amount of the tax liability. One of the resolutions that we can look at qualifying for is an offer in compromise. I use the word “qualify” for several reasons. Not everyone qualifies for this program and it is not a simple settlement for “pennies on the dollar.” To know whether an offer will be an effective resolution, you need to fill out financials that show your net worth, listing not only your assets but also your income and your full expenses. When you look at your own financials, you may see that there is very little disposable income after you have paid bills. However, the IRS does not just look at your particular situation. The IRS has what it calls collection financial standards:
“Collection Financial Standards are used to help determine a taxpayer’s ability to pay a delinquent tax liability. Allowable living expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s (and his or her family’s) health and welfare and/or production of income.” http://www.irs.gov/individuals/article/0,,id=96543,00.html
What this boils down to is that your housing, car expenses, etc. may be over the national limit. Although you may be stuck in your house payment or car payment, the IRS, for the offer program, will normally not allow anything higher than the national standards. The IRS also does not take into consideration credit card payments or other such unsecured debts. Paying for your son or daughters school tuition also does not count as a “necessary” expense.
Thus, you can see that although this can be a great tool for a resolution because you are settling your debt for less than what is owed, you must meet some stringent qualifications. There are other resolutions that need to be considered. For example, if you owe tax liability from a 2000 1040 that was filed on time, would you want to submit an offer when the statute of limitations (which is 10 years from the date of filing) is close to running? It is a good idea to consult with an attorney for the best resolution.
Comments are closed.