After an IRS audit or other tax dispute, a taxpayer may find himself or herself with a significant tax liability that he or she is unable to pay. When a taxpayer does not have enough money to pay off a tax debt, or when doing so would cause economic hardship, the taxpayer may wish to consider an offer in compromise with the IRS.
IRS offer in compromise
An offer in compromise allows a taxpayer to make an agreement with the IRS to pay less than the full amount of taxes owed. If the IRS accepts the offer and the taxpayer keeps up with payments and the terms of the agreement, the IRS will not attempt to collect the remainder of the original tax debt.
To be eligible for an offer in compromise, a taxpayer must be current with all required tax filings. In addition, he or she must have made all required estimated tax payments for the year. A taxpayer cannot participate in the offer in compromise program if he or she has an open bankruptcy case.
When deciding whether to accept an offer in compromise, the IRS considers the taxpayer's "reasonable collection potential." The RCP is the IRS's measure of the taxpayer's ability to pay the tax debt, determined by the value of the taxpayer's assets, anticipated future income and basic living expenses. The IRS may even evaluate the worth of bank accounts, cars and other personal property of the taxpayer. If the taxpayer's RCP is less than the full amount of the tax liability, it may accept the offer in compromise.
If the IRS accepts the offer in compromise, the taxpayer has two payment options: lump sum or periodic payment. With a lump sum payment, the taxpayer makes an initial payment of 20 percent of the offer amount when applying for the offer in compromise. If the offer is accepted, the taxpayer then must pay the balance of the offer amount in less than six payments in 24 months or less.
If the taxpayer chooses periodic payment instead, the taxpayer makes an initial monthly payment when applying for the offer in compromise, then continues to make monthly payments until the offer is accepted and the total offer amount is paid. The payments are made in 6 or more monthly installments up to 24 total payments after the offer is accepted.
In general, the payments under either option must be paid in addition to a $150 application fee, unless certain low-income guidelines are met. Further, the payments are not refundable, even if the taxpayer's offer in compromise is not accepted. Instead, the payments will be applied the taxpayer's tax debt, and IRS collection actions may continue.
There are many intricacies to the IRS's offer in compromise program. If you have a tax debt that you think you cannot pay, contact a tax lawyer with experience in offers in compromise to discuss your situation.