An Offer in Compromise, according to the IRS, “allows you to settle your tax debt for less than the full amount you owe.” It could be one option for a taxpayer who cannot pay the entire amount of a tax liability, “or doing so creates a financial hardship.” The IRS considers the taxpayer’s circumstances and factors such as ability to pay, future income, known expenses and assets.
Not every taxpayer — in fact only about one in four — can qualify to settle a tax debt through an Offer in Compromise, and a the IRS applies strict criteria. But first the taxpayer has to be up to date with all tax returns, including estimated tax payments and definitely cannot apply when undergoing bankruptcy proceedings.
Using the IRS Offer in Compromise Pre-Qualifier and following the directions in the instruction booklet (Form 656-B), you can get a quick look on potential eligibility to apply for a reduction in your tax bill. The process involves filling in financial data — income, assets, liabilities — and getting an immediate indication of whether you qualify under the IRS formula.
In the past, the IRS has been somewhat inflexible in determining equity in assets claimed, as well as allowable living expenses. In an effort to buff up its image somewhat, and probably because of recent hard times, the IRS last year announced a new phase to its Fresh Start Program. According to IRS Commissioner Doug Shulman:
“This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years. It is part of our multiyear effort to help taxpayers who are struggling to make ends meet.”
Again, it’s all about the formulas the IRS uses, but the IRS initiative:
- revises the calculation for your future income.
- allows you to repay your student loans.
- allows you to pay state and local delinquent taxes.
- expands the Allowable Living Expense allowance categories and amount.
The foregoing take into account that taxpayers are struggling to pay other bills. They either remove unfavorable or add positive calculations affecting how much you can take off what you owe.
If you’re one of those three out of four taxpayers who cannot qualify for an offer in compromise, you can still work something out. In fact, you might not even agree that you owe anything. In either case, it is probably time to get some professional tax help, advice and someone who is not intimidated by the IRS auditor. That auditor, by the way, has a conflict of interest. The auditor may be a “public servant,” but has to serve two masters, one of which is the IRS, whose job is to collect money from you.
Having tax problems with the IRS? Contact us. Whatever you’re facing — liens, levies, garnishments or mounting penalties because of failure to file — we can get you back to ground zero. Get our free quote and talk to one of our tax experts.