James B. Urie, Esquire

Did you know that the IRS has a program that allows taxpayers to settle their delinquent taxes for mere pennies on the dollar? You may have seen advertisements on television explaining just that, and in some instances guaranteeing that result. What you may not know is that although the IRS does settle certain tax liabilities for less than full value, this does not occur in every instance and it is by no means guaranteed.

The IRS program is called an "Offer-in-Compromise." It was developed by Congress to move delinquent tax liabilities off of the government's books by agreeing to accept less than full value from delinquent taxpayers. Taxpayers thinking of applying for this program should consider the following before embarking on this comprehensive and time-consuming process:

How It Works
If a taxpayer owes taxes to IRS but does not believe that his or her current income and assets are sufficient to fully pay the liability, he or she may apply for an Offer-in-Compromise. The taxpayer completes IRS Form 656 requesting the IRS accept an amount less than the complete amount of liability. The taxpayer also completes Form 433-A and 433-B (if applicable). Form 433 was developed as a means to evaluate the taxpayer's assets and income potential. Through a series of questions, the form requires the taxpayer to provide full financial disclosure. If, based upon the information in Form 433, it appears that the taxpayer is able to fully pay the liability in one lump sum (either in cash or by liquidating assets) or over time, the Offer-in-Compromise will be rejected. If Form 433 shows that the taxpayer is not capable to fully pay, the IRS, on the other hand, may accept the offer for the amount that the taxpayer is able to pay.

The Offer-in-Compromise may be best understood by an example. Suppose a taxpayer owes a non-joint tax liability for three separate tax years for a total amount including penalty and interest, of $68,000. The IRS is threatening to file a lien or perhaps levy on his or her assets. The taxpayer earns approximately $100,000 per year and owns a house with his or her spouse that has approximately $40,000 in equity. However, the taxpayer has large amounts of credit card and other unsecured debt, and does not have any other assets.

In putting together the Offer-in-Compromise, the taxpayer would complete Form 433-A, listing all of his finances as described above. Then, it becomes a matter of crunching numbers. First, the IRS considers the taxpayer's assets. In this case, the house is the only asset, though the IRS will only be able to include 50 percent of the equity since the liability is not joint. At this point, it would appear that with $100,000 of income plus the $20,000 in equity in the home, the taxpayer would be able to fully pay the tax. However, remember that our taxpayer has a large amount of credit card and other unsecured debt, which costs him approximately $2,000 a month. Plus, he has car and mortgage payments as well as household expenses. In addition, he must continue paying his current state, local, and Federal taxes. Therefore, after adding up all of the expenses and subtracting them from his income, we find that our taxpayer has $175 a month of free income to apply toward the liability. The IRS will then multiply that amount by the remaining months left on the collection statute, and that will equal the value of the taxpayer's future income. So let's assume 48 months remain, multiplied by $175 equals $8,400. Then add to the $8,400 the $20,000 in equity and get $28,400. 

Provided the IRS agrees with our income and expenses, the IRS will accept the taxpayer's offer to compromise $68,000 of tax liability for a payment of $28,400. Not mere pennies on the dollar, but a pretty nice reduction. However, this will not be true in every case. Keep in mind that the IRS scrutinizes each offer it receives and will want to verify all expenses and assets. In addition, the IRS will pull credit reports and perform asset searches to ensure that the taxpayer is not hiding assets or stretching the extent of his or her liabilities.

Conditions of Acceptance
Once the IRS accepts the Offer-in-Compromise, it comes with certain strings attached. First, the taxpayer must actually follow through with making the payment or payments. Second, the taxpayer must stay compliant with all filing requirements and estimated tax payments for a period of at least five years from the date of acceptance of the offer. If the taxpayer fails to meet either of these requirements, the IRS may revoke the accepted offer, in which case, the entire compromised liability, plus interest, is placed back on the taxpayers account and the collection process begins again.

Tips for Filing an Offer-In-Compromise
First, always be honest and responsive to the IRS. Remember that your offer is reviewed by an individual IRS employee whose sole job is to collect and review the applications to compromise. Be creative. There may be certain assets which you have to place on the offer but that should not be considered as your assets. If explained correctly, the IRS may agree and not consider those items as assets for this purpose. Lastly, remember that IRS acceptance is not guaranteed. If you have questions or concerns, contact a legal representative at MacElree Harvey.

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