The IRS’s offer in compromise program allows taxpayers facing financial hardships to settle their outstanding tax liability for pennies on the dollar.
The amount the IRS will accept is dependent upon a stringent formula, but the variables are subject to massage. When working with the agency to get a compromise approved, there are things about your story that the IRS should know in order to move it in the direction of acceptance.
The IRS will always consider the statute of limitations when evaluating an offer since it has 10 years to collect an outstanding tax debt. If you are between jobs and have no means to pay your tax bill but there’s eight years left before the statute runs out, the IRS will likely want to deem you ‘currently not collectable’ for a year rather than accept a reduced amount. This is especially true if you are young and healthy with good prospects.
To be deemed currently not collectable means the IRS will not take any collection action against you: no levies, no threatening phone calls. Interest and penalties, however, continue to accrue. At the end of the one-year period, the agency will get in touch with you again to determine your ability to pay. At that time, if you are gainfully employed and the numbers crunch in its favor, it will expect you to either repay the debt in full or arrange for an installment agreement.
If you are instead old and feeble on a fixed income barely able to make ends meet, the statute of limitations will not be such an important element in the IRS’s decision. If it appears repayment before the statute runs is not possible, the IRS will settle for a reduced amount. The agency will never settle for zero: You must offer something, even if it’s a couple of hundred bucks on a bill of a couple hundred thousand.
Other considerations taken into account when reviewing an offer include the health of you or your dependent(s). Let’s say you have a child with special needs that requires costly monthly payments. This is a variable that the IRS is willing to add to the formula to determine in your favor. I’ve handled a couple of cases in which the child in question was actually an adult, but the parent claimed the dependent and provided more than 50% of support. The IRS allowed the extra expenses and reduced the tax bill to the amount the taxpayer requested.
Your health is an ongoing factor. Perhaps you are young, but have a serious ongoing illness that prevents you from making a decent living. Your problem could even be psychological or perhaps drug or alcohol related. Even with plenty of time left on the statute, the IRS will consider these conditions and make allowances.
The numbers play the most important part but as you can see, other factors also come into play. When presenting an offer in compromise, include this information to help in arriving at a fair and equitable compromise.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all 50 states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, Calif., and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Her new e-book Taxpertise for the Creative Mind Murder, Mayem, Romance, Comedy and Tax Tips for Artists of all Kinds is available at all major booksellers. Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.