An Overview of the IRS Tax Collections Process for Non-Tax Lawyers
23. The Offer in Compromise Process: Types of Offers in Compromise
The Offer in Compromise Program is a program that was developed by the IRS to give taxpayers a fresh start on life. A taxpayer in exchange for a lump sum or in exchange for a settlement of monthly payments can eliminate past tax liability in exchange to the promise of future compliance to the IRS.
If the taxpayer promises to pay in full and on time, and file on time then the IRS will forgive their past tax liability. Sounds a good, great deal but it’s also a tremendous deal for the government, as well, because the taxpayer is essentially getting back into compliance to paying everything and the government loses that cost of having to administer the taxpayer’s file. It’s actually a win-win for both parties.
With that said, there’s been a lot of negative press associated with the Offer in Compromise Program. You’ll see hilarious ads on TV that you can settle your tax liabilities for putting your pennies on a dollar.
Although that is true, a lot of people have abused the program. They submit Offers in Compromise that don’t have a chance of being accepted.
Offers in Compromises work on a pretty strict formula which I will get into a minute. The most common type of Offer in Compromise is what we call a Doubt as to Collectability Offer in Compromise.
A Doubt as to Collectability Offer in Compromise is one where you turn the IRS, you used to take my Offer in Compromise because you will never ever be going to collect this money from me. That is by far the most common type of Offer in Compromise because most people who submit Offers in Compromise are fairly cash strapped.
The second type of Offer in Compromise is what is called as Doubt as to Liability Offer in Compromise where there is a genuine dispute over the tax liability. That liability has not reached a point where it has been adjudicated in tax court.
For example, if you have been subject to an audit and you disagree with the audit results, one of the options that you have is filing a Doubt as to Liability Offer in Compromise. That’s usually not the best approach.
If you are thinking about filing a Doubt as to Liability Offer in Compromise you should consult with a tax professional. We can help you steer the ship in terms of whether a Doubt as to Liability Offer in Compromise is acceptable or whether there is another avenue of relief that you should consider.
The third type of Offer in Compromise is something that we call Effective Tax Administration. Effective Tax Administrations are Offers in Compromise that don’t fall into the Doubt as to Liability bracket, and they don’t fall in the Doubt as to Collectability bracket, but they should fall within another bracket that is still viable grounds for the IRS to accept the offer.
A good example of an Effective Tax Administrative offer is…I have a client who is a little old lady. She’s living off the last little bits of her retirement and her pension. She’s living up to pay the liability in full. There’s no question about that.
But if she pays the liability in full she’s not going to have any more money to support her basic living expenses or support her medical expenses. So we file an Effective Tax Administration Offer in Compromise in order to get rid of her liability.
Even though she has the ability to full pay, she doesn’t qualify for Doubt as to Collectability, we’re putting her into that Effective Tax Administration category because of her circumstances.
Effective Tax Administration is a catch-all category that you can use to get rid of liabilities.