A potential way to deal with unpaid taxes is by using an offer-in-compromise, which is a technique that may allow you to settle your tax debt for a fraction of its face value. This option is available only if you have already filed your return but are unable to pay your taxes.
Like any creditor, the IRS prefers a partial payment to no payment at all. Thus, the IRS might be willing to settle your liability for less than the full amount if: (a) you aren’t able to pay the full amount, (b) there is doubt as to how much the tax liability is, (c) collection of the liability would create economic hardship for you (for instance, if you are out of work due to health problems, or if sale of your assets to pay the tax would leave you without enough money to meet basic living expenses), or (d) compelling public policy or equity considerations exist, and due to the exceptional circumstances (such as a medical condition that prevents proper management of financial affairs, or reliance on erroneous advice from the IRS), the IRS’s collection of the full liability would undermine public confidence in the fair and equitable administration of tax laws.
The process is started by actually making an offer-in-compromise. If the offer is based on any reason other than doubt as to how much the tax liability is, you must submit your financial information along with the offer. If it is grounded on doubt as to the liability, the IRS is not permitted to request a financial statement. Partial payments must be made to the IRS while a periodic payment offer is being considered. For lump-sum offers, or offers involving five or fewer installments, a 20% down payment (of the total offer amount) must be made with the application.
In order to obtain an offer-in-compromise based on any of the above mentioned grounds except doubt as to liability, you must agree to comply with all tax law rules on filing returns and paying taxes for the longer of five years or until the offered amount is paid. If you don’t comply with these rules, the compromise will terminate and the IRS can seek collection of the original liability amount.
If you would like a free consultation on whether an offer-in-compromise will work in your situation, please contact our office.
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