February 24, 2015

Denver Tax Attorney   What is An Offer in Compromise?An Offer in Compromise is a program of the IRS that allows you to reconcile your tax debt at an amount that is lower than what is actually owed. This written offer to the IRS or Colorado Department of Revenue may be an option for you in lieu of or in addition to bankruptcy.

In Colorado, an Offer in Compromise may be filed using one of these three grounds:

  • Doubt as to Liability – You claim, regardless of your ability to pay the tax debt, that there exists an error in the liability. The government may accept an Offer in Compromise if there is doubt that the debt actually exists.
  • Doubt as to Collectability – Although you recognize the accuracy of the tax debt, you claim to be unable to fully pay the tax debt before the statute of limitations for collection expires. If the IRS believes that the amount cannot be paid back, they will be may be willing to accept a portion of what you owe.
  • Effective Tax Administration – Even if the state or IRS feels that the owed tax is valid and that you have sufficient income and assets to pay for the whole debt, you can possibly plead that the full collection would result in financial hardship.

Generally, the IRS does not accept the initial Offer in Compromise, but instead makes a counteroffer for a larger amount. Except for special circumstances, the IRS will not accept an offer if the agency believes that your liability can be paid either in full as a lump sum or through a payment agreement.

Take note that an Offer in Compromise may be either accepted or rejected based on the discretion of the IRS. Most Offers in Compromise are not accepted if the taxpayer owns assets such as a vehicle or home with equity that the tax authorities may seize.

Qualifications

To be eligible to apply for an Offer in Compromise, you must first file all tax returns you are legally required to file and make all estimated tax payments required for the current year If you are a business owner with employees, you must also make all required federal tax deposits. If you or your business is bankrupt, you will not be deemed eligible.

Payment Options

If an Offer in Compromise is accepted, payments can be made in any of the following ways:

  • Lump Sum – The lump sum cash option requires 20% of the total offer amount to be paid with the offer, with the remaining balance to be paid in five or less payments within two years of the date the offer is accepted.
  • Periodic Payment – The first payment under the periodic payment option must be made with the offer, while the remaining balance should be paid within a two-year period according to your proposed terms. You must, however continue to make all succeeding payments while the IRS is evaluating your offer. Your offer will be returned if you fail to make these payments.

Determining if an Offer in Compromise is the route to take and then petitioning the IRS for it can be a complicated procedure that is often best left to an experienced tax attorney.

Categories: Tax Tips