After applying formulas to value the taxpayer's assets and projected future income, the IRS will determine the reasonable collection potential of the account. The reasonable collection potential is the amount ultimately required to settle, or compromise, the tax debt.
Knowledge is Key to Reducing IRS Debts
An Offer in Compromise -- the term used by the IRS to describe the process for settling a tax liability for less than the full amount owed -- can yield a dramatic tax savings.
Success depends upon expertise in IRS procedures and a careful analysis of the case before the Offer is submitted.
Private collection agencies seeking to collect an unpaid debt are almost always willing to quickly
make concessions with the debtor to resolve the account. Reductions in the amount owed can usually be obtained informally and with little effort. By contrast, settling a tax liability with the Internal Revenue Service (“IRS”) is a complicated process that requires an understanding of the policies driving the Offer in Compromise (“OIC” or “Offer”) program and the procedures employed by the IRS.
The current OIC program took effect on July 16, 2006. One of the most significant changes was to require taxpayers to make a 20% down payment with their OIC, which is not refunded if the Offer is rejected. Despite the recent procedural changes, the underlying objective of the OIC program remains the same.
In cases where there is bona fide doubt that the total liability can be collected, the IRS seeks to secure as much as possible and as efficiently as possible.
This objective is identical to that of the private debt collector. The substantial difference between the two is the process associated with settling the debt. Few debt collection agencies require a financial statement submitted under the penalties of perjury, and none have the access to information and investigative resources available to the IRS.
The savvy taxpayer will approach the IRS with a mindset of negotiation and persuasion. It is incumbent
upon the taxpayer to convince the IRS that the Offer should be accepted. An adversarial strategy is
seldom effective and ill advised. While the IRS is obligated, in most cases, to consider an Offer, it is important to understand that the IRS is never required to accept an OIC.
Moreover, the burden is on the taxpayer to establish the
doubtfulness of collection by making a complete and accurate financial disclosure, which will be subject to a thorough investigation by the IRS.
After applying formulas to value the taxpayer's assets and projected future income, the IRS will determine the reasonable collection potential of the account. The reasonable collection potential is the amount ultimately required to settle, or compromise, the tax debt.
An understanding of the IRS's financial formulas, and grounds for deviating from them, is critical to negotiating a favorable settlement.
In addition to knowing how the IRS evaluates an OIC, there are many other factors that must be considered by the taxpayer prior to filing an Offer. As a general rule, for example, the IRS has ten years to collect a tax debt. If it fails to do so within that time, the liability is written off permanently and the taxpayer is forever relieved of any obligation to pay it.
The filing of an OIC stops, or tolls, the ten-year statute of limitations for collection. Many OICs involve multiple tax periods, each with a different collection statute expiration date. Evaluating the impact of the Offer on all collection statutes is clearly an important pre-filing consideration.
The IRS has long recognized that there are situations where a taxpayer cannot realistically satisfy the tax, penalties, and interest due on an account. In fact, the first legal authority for OICs dates back to 1868. Throughout the years, the Offer program has experienced significant changes.
What hasn't changed is the taxpayer's key to success: knowledge of and experience with IRS procedures.
Gerald W. Kelly, Esq.
Article: Copyright © 2006-18