The Internal Revenue Service has statutory authority to compromise tax liability where there is doubt as to liability or collectibility or when it is indicated for the “effective administration of the revenue”. The IRS attitude toward compromises based upon collectibility has changed dramatically from time to time. When I worked for the IRS in the 1970s there were almost no IRS offer in compromise accepted based upon doubt about collectibility. Ten years ago, the IRS solicited offers in compromise based upon collectibility and it soon became flooded with offers, many of which were frivolous. In response to that, several years ago the IRS closed its window on offers and it now rarely accepts an offer. Don’t count on an IRS offer in compromise being the solution to your problem, and don’t believe the ads that say time is running out for the “pennies on the dollar” settlement.
The acceptance percentage of processable offers over time reflects the changing attitudes of the IRS toward offers.
The IRS is back in the business of accepting offers in compromise and they have become a much more attractive method for dealing with tax delinquencies. Several changes to the IRS procedure go a long way to making offers more attractive. These include:
- Taxpayers with income below 250% of the DHS poverty guidelines are exempt from paying a $150 application fee and from making 20% down payments on offers.
- There has been some liberalization in expenses that are regarded as allowable in computing disposable net income.
- Under the previous rules, the IRS wanted to see as a minimum offer payment of equity and assets plus what could be collected over 5 years under a payment agreement. These rules have been changed to provide that if the amount offered is paid in a lump sum, the IRS wants to get what could be collected over 12 months under a payment agreement. If the offer is to be paid through short-term payments the IRS wants to collect what could be paid under 24 months under a payment agreement. This is particularly attractive for taxpayers with high cash flow who can raise money for a lump sum payment.