The IRS has more collection powers than any private debt collector in the US system. They can for example seize IRA and 401K accounts. These are off-limits to any other creditor. Given these powers, why would they let anybody off the hook?
The answer is that a lot of times it just makes sense. The IRS reasons for accepting an Offer-in-Compromise boil down to three categories:
- Doubt as to Liability – this applies to taxpayers that have good arguments that they do not owe the tax either partially or completely.
- Doubt as to Collectability – taxpayers in these cases have nether the income or the assets to pay their tax debt.
- Effective Tax Administration – this involves cases where the taxpayer has the funds to pay the full debt but doing so will create an economic hardship. Think of the 80-year-old with a lumpsum payout from their retirement plan that is needed to pay their living costs for the balance of their life.
Wow - sounds very reasonable. Why then is it that most Offers are rejected by the IRS? The answer to this boils down to two major categories:
- The taxpayer is not current on their tax return filings or has not made their current year estimated tax payments. The IRS will not even consider an Offer if this is the case. First is because the taxes must first be assessed before they can be compromised. Secondly, taxpayers who are not making their current year tax payments will be in default before the ink is dried.
- The second big reason for rejection is that the Offer is too small. The IRS looks at both the equity in the assets you own and your future cash flow. The result of this analysis is the Reasonable Collection Potential or RCP amount. Offer less than this amount and the IRS is going to reason that it is not in the best interest of the government to compromise.
What should you do if you think you might be eligible? Figuring out the RCP amount is complex, so it is probably a good time to get professional help. Understanding how the RCP formula works will allow you to arrange your financial affairs in advance of the offer to minimize the offer amount without having it rejected.
If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email firstname.lastname@example.org .