An offer in compromise is one avenue for settling a tax liability for less than what is actually owed.
Generally, the IRS will entertain valid offers if there is some doubt as to whether the taxpayer owes the tax or whether the IRS believes that it can actually collect the tax (i.e., there is doubt as to collectibility), if there is some doubt that the tax liability is valid, or if not collecting the tax would not discourage voluntary compliance.
In evaluating offers submitted based on doubt as to collectibility, the IRS scrutinizes the taxpayer’s income and assets. These two items give the IRS an idea of its “reasonable collection potential.” This factors into whether the IRS will entertain an offer-in-compromise or other remedies. An offer in compromise based on doubt as to collectibility will not be deemed to be realistic if the amount offered is less than the taxpayer’s reasonable collection potential. If the taxpayer makes an unrealistic offer, the offer will be rejected by the IRS.
Statistics indicate that most offers in compromise are rejected because they are not valid. The court cases bear this out too.
There are a number of “tax resolution” companies that promise to use the offer in compromise to settle tax debts for “pennies on the dollar” without first inquiring about the taxpayers particular circumstances. While some tax debts very well can be settled for “pennies on the dollar,” most can not. If that were the case no one would be willing to pay their taxes. Taxpayers should be wary of any “tax resolution” companies, especially if they tell the taxpayer that they can settle a tax debt for “pennies on the dollar” without having thoroughly examined the taxpayers particular situation.
It should also be noted that, depending on the circumstances, there may be other avenues available for settling a tax liability for less than what is actually owed. For example, the IRS auditor, IRS collector, the IRS appeals officer, or the IRS attorney may be willing to settle or concede certain tax liabilities so that they can simply close the matter or they may deem the hazards of litigation too high given the amount of tax owed. In other cases, the taxpayer may not owe the government anything or the government will not able to collect the outstanding tax liabilities anyway. These avenues should always be explored before submitting an offer in compromise.
An experienced tax attorney can advise you about your rights and help prepare a valid offer in compromise.
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