This article is written for those that owe taxes whose amount of tax debt ratio pales in comparison to the income that they have coming in. This does not take into account that you must have a place to lay your head, eat, and enjoy coolness in the heat and warmth in the winter. Once these items are factored in, it is inconceivable, based on your income and debt, that you will ever be able to pay what you owe in full to the IRS.
If you are unable to pay your tax debt in full, and you know for a fact that you are only delaying the inevitable by using the other methods of payment such as Extensions of Time to Pay, Installment Agreements, and Currently Not Collectible, an Offer In Compromise (OIC) may be an option. Note that it should be used as a last resort to the methods of payments listed above and if borrowing from relatives, 401ks, cash value insurance policies or selling assets is not available to you.
An Offer in Compromise is an agreement between you and the IRS to resolve your debt for less than the amount owed. If this program sounds familiar to you, this is what Ronnie Lynn Deutsch and JK Harris and Associates and other promoters seek to do for you for thousands of dollars in fees for something that the government charges at best the paltry sum of $150! If you are classified as low income, you pay nothing! The only cost to you is the time that it will take to complete the paperwork and gather the documentation to submit. You would have had to do this anyway with the promoters but you are saving thousands of dollars, which means a lot to people that are up to their eyeballs in debt and are looking for a more honorable alternative than bankruptcy by working directly with the creditor, which is this case is Uncle Sam. But I digress. Let us return to the business at hand. The IRS accepts your offer when you are able to show the following with reference to the debt:
1. Doubt that the assessed tax is correct-Liability Doubt. Unless it is obvious to a 2 year old that there is no way that you owed the taxes in the first place, with all the necessary documentation to boot, you may want to leave this one alone.
2. Doubt that the tax could ever be paid-Collectability Doubt. This tends to be the most common reason for the submission of the application.
3. Economic Hardship and Unfairness and Inequitability on the part of the IRS to force collection-Effective Tax Administration. In short, attempting to collect the taxes will make IRS look bad and might bring about a backlash against them.
In order to apply, use Form 656 for items 2 and 3 above. Form 656-L is used for item 1 only. Only one of the forms can be submitted at any given time. For example, one cannot claim simultaneously that the tax is both incorrect and cannot be paid.
NOTE: If the taxes have not been assessed (The return has not been filed or has been newly filed but not been processed by IRS), those applicable tax periods cannot be compromised until the returns are filed and the returns are processed. Similarly, if you have unfiled returns, you will not be able to apply for an Offer in Compromise until you file those outstanding returns.
In completing the Form 656- L, one will need to indicate the amount that is believed to be the correct tax liability after credits and payments have been taken into account. The amount cannot include refunds that were already paid to the IRS or a refund due. A detailed written statement must also be attached explaining why the tax is incorrect. In addition, as stated above, documentation should be attached to support the claim of incorrect liability.
Cora Parks is a lifelong Atlantan whose vision is to bring year round proactive tax counsel and personal responsibility to the masses. In addition to the Tax Today blog, she has published the books “Everyday Tax Tips, Part I” and “Beware Of Preparer”.