FAQs: Offer in Compromise

What do I need to show in order to settle my tax debt for a smaller amount than the amount claimed by the IRS?

Tax Code §7122 authorizes the IRS to compromise the tax debt. This is usually called the Offer in Compromise. The Tax Code requires the IRS to evaluate whether the offer made by the taxpayer meets the requirements for acceptance. There are basically three grounds for compromising a tax debt: (1) doubt as to liability, (2) doubt as to collectability, and (3) effective tax administration. Doubt as to liability exists when there is a dispute about the existence or the amount of the tax. Doubt as to collectability exists when the taxpayer can demonstrate that his or her assets are not sufficient to pay the entire tax. The IRS may also settle the tax debt if, regardless of the taxpayer's financial situation, it is shown that public policy considerations require such a settlement.

Offers in compromise based on doubt as to collectability are the most popular ones. When the IRS evaluates such an offer, the revenue officer considers the taxpayer's ability to pay all the tax after paying for his or her basic living expenses. The taxpayer needs to show that his living expenses are in line with the national and local living expenses established by the IRS. In addition, the taxpayer's assets are taken into account by the IRS in estimating ability to pay the tax. Concealing such assets from the IRS is not a good strategy because if it comes to light later on, even an accepted offer may be revoked by the IRS.

Can the IRS engage in collection activities such as a wage levy or a bank levy during the period of consideration of the offer in compromise?

No. All collection activities are prohibited during consideration of the offer in compromise. If the offer in compromise is rejected, the taxpayer has another 30 days to appeal the decision without being subject to tax collection activities.

What are the advantages and disadvantages of an offer in compromise?

Before making a decision about approaching the IRS with an offer in compromise the pros and cons of such an offer should be considered.

Advantages:

If your offer is accepted, you will settle your tax debts for a smaller amount than the original tax.
Unless you offer to settle your tax debt for a lump sum, you may pay your tax liability over an extended period of time.
During the consideration period of the offer, the IRS ceases its collection activity.
If your offer is accepted, and you abide by the terms of the agreement with the IRS, no collection activities will be initiated against you during the length of the contract.
Assuming that your offer is accepted and you enter into an agreement with the IRS, your tax liability becomes final and may not be revised upward by the IRS at a later date.
If you enter into a collateral agreement with the IRS as part of the offer in compromise, the IRS may release all tax liens.

Disadvantages:

In the event your offer is rejected, the IRS will have a detailed picture of your financial status since financial disclosure is a condition of consideration of any offer in compromise by the IRS.
By offering to compromise your tax debts, you waive certain rights such as the statute of limitations on collections beyond the normal six-year period.
If you do not perform your end of the bargain, the IRS may initiate immediate collection activity.

To sum up, preparing an offer in compromise is no easy matter and requires detailed knowledge of the law and regulations governing this area of the tax law. Approximately, nine out of ten offers in compromise are rejected by the IRS. If you are considering making an offer in compromise to the IRS or to the taxing authorities in Maryland, Virginia or Washington, D.C., you should seek the advice of a competent tax attorney. A tax lawyer can help you resolve your tax problem by evaluating your overall tax situation and if making an offer in compromise is in your best interest, by helping you prepare a strong offer in compromise application.

Kamyar Mehdiyoun is an IRS and tax lawyer who assists clients with IRS offers in compromise, IRS tax collections, IRS tax debts, tax liabilities, IRS appeals, delinquent tax obligations, back taxes, tax debt relief, tax penalties, tax audits, IRS property seizures, unfiled tax returns, tax evasion & tax fraud and wage garnishments. If you need an IRS tax attorney, contact Kamyar Mehdiyoun’s tax law firm located in Rockville, Maryland and serving Maryland (MD), Virginia (VA) and Washington, DC metro area as well as the rest of the U.S.