It’s a scary thing: to realize you owe more taxes than you can possibly pay off. But before you panic, did you know that the IRS has a policy to assist in just such cases, outside of a loan or payment plan?
Known as an Offer in Compromise (OIC), if a taxpayer finds that their tax liability exceeds their funds or feel they don’t owe the amount due, they can seek to either lower or completely settle the debt with the IRS by qualifying for one of three conditions. These conditions – determined through an in-depth examination into the specifics of each case – are as follows…
Doubt as to Collectability
Most commonly seen in OICs, a taxpayer would file under Doubt as to Collectability if they’re unable to pay the full liability debt due to a lack of money, or if doing so would reduce them to an unsuitable living situation.
To be eligible for a compromise under Collectability, an investigation by the IRS into the taxpayer’s financial situation would be had – evaluating values such as income, expenses, liabilities, and assets – before comparing the numbers to local and national standards of living, known as “allowable living expenses”, which include costs of food, clothing, housing, utilities, transportation, medical bills, and education.
If it’s found improbable through this comparison that the taxpayer can pay their debt in full, the IRS is more likely to accept an OIC.
Doubt as to Liability
If the taxpayer has the financial capability to pay their tax due, but feel that the amount is incorrect or invalid, they can contest the debt through Doubt as to Liability in an OIC. Usually, cases falling under this provision become a legal dispute of the facts or law surrounding the individual’s tax liability and can be settled by compromising on an amount between the two parties.
Promotion of Effective Tax Administration
Applicable only in the rarest of cases, an OIC can also be achieved in the name of public policy if the collection of an individual’s tax liability would result in the public believing the tax administration to be acting unfairly. For example, a taxpayer can request an OIC if they received inaccurate information from the IRS, which later led to a sum of wrongful penalties.
While compromises made under public policy are extremely case-specific and rarely successful, they still contribute greatly to maintaining a fair and effective tax administration and should always be pursued if believed to be applicable.
(This post was based off of this article, by William A. Bottiglieri.)
