Options for Resolving Federal Income Tax Debt

An Offer In Compromise it an agreement between the IRS and a taxpayer to settle tax debt for what the IRS could reasonably expect to collect from you based on IRS criteria rather than the full amount of taxes you owe. You submit an offer with required forms and supporting documents showing that you qualify for an OIC. The IRS will file Notice of Intent to File a Tax Lien while your offer is pending.   The lien will be released if the offer is accepted and completed. If you sell property subject to the lien before you make all payments on the offer and the lien has not been released, the IRS will take proceeds of the sale to apply to your tax liability.

Not everyone is eligible for an offer in compromise and even if you are eligible, the IRS is not required to accept your offer.

There are three main types of Offers in Compromise:

Doubt as to Liability (DATL)

You file this type of offer when there is a genuine dispute about whether you owe the taxes or the amount of those taxes – such as when you failed to dispute or appeal an assessment before the deadline to do so. If there has been a final court decision that you owe the taxes, you are not eligible for a DATL offer. The DATL offer only covers the years for which you claim you are not liable – any other taxes have to be dealt with by different means.  

 Doubt as to Collectibility (DATC)

You file this type of offer when you owe the taxes at issue but can’t pay them in full before the expiration of the statute of limitations (called the CSED in tax-land) through an installment agreement or from the equity in your assets (including retirement funds).  As in bankruptcy, your ability to pay is calculated based on your income, your allowable expenses and the equity in your assets. However, the equity in your home and amounts in retirement accounts that you can access are not excluded for determining your ability to pay as they are in bankruptcy. Additionally, the allowable expenses are more limited than in bankruptcy.

Effective Tax Administration (ETA)

You owe the taxes and under the IRS calculations you are able to pay, but there are exceptional circumstances that either:

(a) create an economic hardship for you and your family if you are required to pay the taxes. You must be unable to pay basic (not affluent or luxurious) living expenses because of special circumstances such as a disabled child, a long-term medical condition, limited income due to age and health, and be unable to borrow against equity in assets.

 (b) provide a compelling public policy or equitable basis for compromise, such as liability arising from reliance on bad advice from the IRS, from processing or other errors or unreasonable delay by the IRS,  or from criminal or fraudulent actions of a third party such as a payroll service provider and you acted reasonably.

A main policy reason for allowing Offers in Compromise is to bring taxpayers into compliance with tax laws and keep them in compliance in the future. Future compliance is vital. If your OIC is accepted, you must remain current with all tax filing and payment obligations through the fifth year after your offer is accepted (including any extensions). This means:

·        You must file all tax returns on time.

·        You must withhold sufficient amounts so you don’t owe at year end.

·        You must make quarterly payments, if required.

If you do not withhold enough in any year, if you do not make quarterly payments if required to do so, if you do not file a tax return on time, or if you for any reason end up owing taxes in the five years after acceptance, your offer may be defaulted, in which case you will be liable for the original tax debt and all accrued interest and penalties – less any payments you made.

The IRS will keep your tax refund for tax periods extending through the calendar year that the IRS accepts your offer. (If your offer is accepted in 2020 they will keep your tax refund for 2020 – which you file in 2021). The refund will not be applied to your offer.

You cannot pay your offer amount with:

• an expected or current tax refund,
• money already paid to the IRS,
• funds attached by any collection action, or
• anticipated benefits from a capital or net operating loss.

Offers in Compromise - Eligibility

To be eligible for an Offer in Compromise, you must:

• File all tax returns you are legally required to file
• Have received a bill or at least been assessed for the tax debt included in your offer
• Make all required estimated tax payments for the current year
• Make all required federal tax deposits for the current quarter if you are a business owner with employees.
• Not be able to pay your tax debt in full through an installment agreement or by liquidating the equity in your assets.

You are also not eligible if:

• You or your business is in an open bankruptcy case (in some jurisdictions),
• IRS has a criminal referral involving the liabilities in the offer to the Dept of Justice,
• For any amount arising from a restitution amount ordered by a court or a tax debt that has been reduced to judgment,
• Any 965 tax liability for which an election was made under 965(i),
• You have a pending Doubt as to Liability Offer or Effective Tax Administration claim, or
• Your business owes trust fund taxes and the employer has entered into a compromise for a portion of the trust fund tax liability, unless the trust fund portion of the tax is paid or the Trust Fund Recovery Penalty determination has been made on all potentially responsible individuals.

If you file an offer and are determined to be not eligible, the IRS will keep the money you send but not accept your offer.

If you are temporarily unemployed or underemployed, you may qualify for CNC status. Your income must be so low that paying the taxes would cause a significant hardship. Significant hardship means you have nothing left after paying basic living expenses. Basic does not include paying a mortgage or car note above the IRS guidelines for those expenses – even if your mortgage company and car lender disagree. While you are in CNC status, the IRS won’t garnish your wages or levy your bank accounts, but it will garnish your tax refunds. Penalties and interest will continue to accrue. They will usually file a lien if you owe more than $10,000. You can start the process by phone, but you must provide the IRS with proof of your financial situation. The IRS will review your financial situation each year to confirm that you still qualify.