NEWSLETTERS
IRS Offers in Compromise
If IRS is after you to collect a tax liability that’s beyond your capacity to pay, you should be aware of a technique that may allow you to settle your tax debt for a fraction of its face value. It’s called an offer-in-compromise.
Like any creditor, IRS prefers a partial payment to no payment at all. Thus, IRS is sometimes willing to settle a tax liability for less than the full amount if (a) the taxpayer is unable to pay the full amount, (b) there is doubt as to how much the tax liability is, (c) collection of the liability would create economic hardship for the taxpayer (such as where the taxpayer is out of work due to health problems, or where sale of assets to pay the tax would leave the taxpayer without enough money to meet basic living expenses), or (d) compelling public policy or equity considerations exist, and due to the exceptional circumstances IRS’s collection of the full liability would undermine public confidence that the tax laws are being fairly and equitably administered. Exceptional circumstances for this purpose might include situations where a taxpayer relies on erroneous advice from IRS, or a medical condition prevents a taxpayer from managing his financial affairs.
The taxpayer starts the settlement process by making an offer-in-compromise. If the offer is grounded on any reason other than doubt as to how much the tax liability is, financial information must be submitted along with the offer. If it is grounded on doubt as to the liability, IRS is not permitted to request a financial statement.
Except where the offer is based only on doubt as to liability or where the offer is filed by a low-income taxpayer, the taxpayer is required to make partial payments to IRS while the offer is being considered by IRS. For lump-sum offers (which include single payments as well as payments made in five or fewer installments), taxpayers must make a down payment of 20% of the amount of the offer with the application. For periodic payment offers, the taxpayer must comply with the taxpayer’s own proposed payment schedule while the offer is being considered.
Except where the offer is based only on doubt as to liability, the taxpayer must agree to comply with all tax law rules on filing returns and paying taxes for five years or until the offered amount is paid, whichever period is longer. If these requirements are not met, the compromise terminates and IRS can seek collection of the original liability amount.
A streamlined offer-in-compromise program is available for taxpayers with annual incomes up to $100,000. In addition, participants must have tax liability of less than $50,000. An offer must be submitted in writing on IRS’s Form 656. Any offer made orally is invalid.
A $5,000 penalty applies to any person who submits an application for a compromise (or submits any one of certain other types of specified submissions) if any portion of the submission is either based on a position which IRS has identified as frivolous, or reflects a desire to delay or impede the administration of federal tax laws. However, the penalty is clearly aimed at those who abuse the process and should not deter taxpayers with legitimate offers from using the compromise process.
About the Author
D. Steven Yahnian has been a member of the California Bar and a practicing Attorney since 1980. He has also been a California CPA since 1984. Mr. Yahnian also holds the CFP® designation.
Mr. Yahnian practices in the following areas of law through YAHNIAN LAW CORPORATION:
- Estate Planning & Administration
- Asset Protection Planning
- Tax Planning, Tax Debt Resolution and Tax Litigation
- Business & Corporate Law and Planning
- Real Property Law & Planning
As a CPA/CFP, Mr. Yahnian also has a separate accounting and tax return preparation practice called DSA ACCOUNTING.
Mr. Yahnian is a California State Bar Certified Specialist in the following
• Taxation Law and
• Estate Planning, Trust & Probate Law.
Mr. Yahnian received a B.S. degree in Accounting from USC, a J.D. from Loyola University of Los Angeles School of Law and an LL.M. in Taxation from New York University Law School. He also has a Certificate in Taxation from UCLA (with distinction). Mr. Yahnian also has an MS in Taxation* from UCLA (with Distinction).
*Equivalent
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