One way of removing your tax liability is to take advantage of an offer in compromise. An offer in compromise is an offer made by the taxpayer to pay a reduced amount from the original tax liability. It’s a good option for business owners or private individuals with federal tax debt who can afford some of the amount but not the full balance. If the IRS accepts an offer, the taxpayer can expect to pay a reduced amount and even schedule installment payments.
Getting Your Offer Approved
To get your offer approved, you must have a valid reason recognized by the IRS. Any of the following three circumstances can serve as a reason why you’re making an offer in compromise:
- Doubt As To Liability – there is a doubt about the existence of the tax liability itself.
- Doubt As To Collectibility – there is uncertainty that the IRS can collect the full tax liability due to circumstances such as insolvency, lack of assets, etc.
- Effective Tax Administration – collecting the tax liability in full will lead to inequity or economic hardship.
Your offer must also be greater than your RCP, which stands for reasonable collection potential. The IRS uses the RCP to determine a taxpayer’s ability to pay the tax. You must also submit all the necessary documents and fees. Failure to comply with the required documents and fees will result in your offer being returned. Don’t worry if this is the case – you can always cure your offer’s defect if it is returned and resubmit. If the IRS rejects your offer, you can still appeal the decision through the appeals process, which will be detailed in your rejection letter.
Not everyone qualifies for an offer in compromise. An experienced tax attorney can evaluate whether you meet the requirements for an offer in compromise and submit an effective offer on your behalf.