Suddenly receiving a surprise tax bill in the mail is not something anyone looks forward to. However, taxpayers who face financial difficulties paying their back taxes may be able to settle the total amount due for less than the amount owed through the Offer in Compromise (OIC) program.
To be eligible for an OIC, a taxpayer must have filed all previous years’ tax returns and made all necessary estimated tax payments for the most recent tax year. Taxpayers who are currently involved in a bankruptcy proceeding are also ineligible for an OIC.
The IRS maintains almost total discretion in determining whether to accept a taxpayer’s OIC. When reviewing an OIC, the IRS considers the taxpayer’s unique situation, including:
Their ability to pay,
Their expenses, and
The amount of equity they have in the assets they own.
It is important to approach the IRS with a reasonable OIC based on the above circumstances. Otherwise, the IRS will reject the offer, leaving the taxpayer in a worse position than before, as a rejected OIC remains on file with the IRS.
In a recent case, the United States Tax Court issued an opinion rejecting a taxpayer’s OIC. The taxpayer was a partner at a law firm with an annual salary of more than $200,000. Between the years of 2012 and 2016, he failed to satisfy his tax obligations, resulting in a tax balance of more than $204,000.
The IRS sent the taxpayer a notice of Federal Tax Lien, and the taxpayer responded by presenting an OIC of $50,000. As a part of the process, the taxpayer submitted an estimate of his recent monthly income and expenses, which were approximately $23,000 and $22,655, respectively. The taxpayer, who was 63 at the time, also noted that he would not be eligible for Social Security benefits because he received a lump-sum payment when he left a position with the federal government years earlier.
The IRS conducted an independent review of the taxpayer’s financial situation, finding that his monthly income was more along the lines of $31,000, with monthly expenses averaging just over $17,000. Thus, according to IRS calculations, the taxpayer’s monthly disposable income was over $14,000. The IRS also disagreed with the taxpayer regarding several of his asset classes, including the amount of money in his checking account, the value of an undisclosed vehicle, and the amount of equity he had in his home. Taking all this into account, the IRS calculated the taxpayer’s Reasonable Collection Potential to be $688,071. Thus, the IRS rejected the OIC, taking the position that the taxpayer could afford to repay the full balance due in 33 months.
After further negotiations, the IRS offered the taxpayer a 72-month repayment period, which he rejected. The taxpayer then appealed the rejection of his OIC to the U.S. Tax Court.
The U.S. Tax Court found in favor of the IRS, noting that none of the disputes regarding the taxpayer’s “monthly disposable income and available assets vastly exceeded their OIC.” The court explained that it would only reverse a rejection of an OIC if there was an abuse of discretion. Finding that not to be the case, the court granted summary judgment to the IRS.
Are You Facing a Significant Back-Tax Bill?
If you have a large balance of back taxes and are worried about your ability to settle the debt, the Brandywine Tax Resolution may be able to help. At Brandywine Tax Resolution, we have extensive experience preparing compelling offers in compromise on behalf of taxpayers of all economic backgrounds. Many of our clients have successfully settled their outstanding IRS tax debt for significantly less than they owe. To learn more, and to speak with a West Chester tax attorney about your situation, contact Brandywine Tax Resolution at 610-235-7577. You can also reach us through our online contact form.