Offer in Compromise - March 2010

Offer in Compromise Program offered by the IRS

March 2010

The IRS just announced that it would be more flexible working with taxpayers having trouble paying their taxes.

Question: If you owe taxes to the IRS and cannot pay the taxes, is their anything you can do?

Answer: The IRS for many years has had a program called "Offer in Compromise." Basically, the idea behind the program is that the IRS will accept an offer to pay less than your total taxes, or they will enter into a payment plan if you can show either that there is a doubt about collectibility or a doubt about the liability. For most taxpayers, using this program brings up the issue of collectability.

Question: If someone owes taxes and feels they cannot pay what should they do?

Answer: You just can't write a letter to the IRS and say I can't pay. There are all sorts of forms to fill out to prove you are not able to pay all of the tax liability. I recommend that the person have his or her accountant or attorney work with the IRS on their behalf. I don't recommend that you do this on your own. However, a good place to start researching for yourself is the IRS Offer in Compromise Booklet, which is called Form 656-B. This booklet is a one-stop shop for the information that you need for filing an offer in compromise.

Question: What do you have to do to qualify for an offer in compromise with the IRS?

Answer: You have to submit financial information to show the IRS that you cannot make a full payment. The new position taken by the IRS will be that they will consider your current income and potential for future income. In the past, the IRS would only look at your past tax returns to determine your ability to pay. This will be helpful for the recently unemployed or people who have had their salaries reduced.

Question: What if you just cannot work out a deal with the IRS?

Answer: Unfortunately, some people will never be able to pay their back taxes, but for one reason or the other cannot work out a deal with the IRS. For those people, they may have to consider bankruptcy. Generally personal income taxes due for tax years over three years old can be discharged in bankruptcy.

Question: Where can people go for more help on this?

Answer: The IRS has a specific webpage for unemployed taxpayers and others in financial distress. Also, as I mentioned previously, work with your accountant or lawyer. There are other companies that say they can solve your problems. I recommend that you be careful of fly-by-night organizations that guarantee you results and then take your money and disappear. However, the worst thing you can do is ignore the problem. Eventually the IRS will find you.