The Internal Revenue Service is accepting more partial-payment offers, but the process can be long and involved, generally requiring taxpayers to show they’re unable to pay the full amount, are being treated unfairly or that their liability is less.
The Internal Revenue Service has made it easier — though by no means automatic — for delinquent taxpayers to cut the amount they owe on back taxes.
The agency has a program it calls an “offer in compromise,” which develops payment plans for taxpayers who can demonstrate that they face problems involving ability to pay, fairness or liability.
The burden of proof rests with the taxpayer, who needs to make a payment offer, which the agency is free to reject. While it is easier than it once was to have an offer accepted, filling out the forms is no picnic.
Still, the acceptance rate for taxpayers’ offers, which was under 25 percent as recently as 2010, rose to 42 percent in 2013, according to the IRS.
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People who demonstrate that their tax bills cannot be collected must show that they are, to put it gently, financially challenged. To receive such an agreement, the taxpayer must acknowledge a tax liability and demonstrate an inability to pay all of it, saying, in proper bureaucratic form, “Look, you can’t get blood from a stone.”
The IRS does not break down offers by type, according to Anthony Young, a spokesman. Don’t count on having your offer accepted. But when the IRS does agree to it, it may amount to “the deal of a lifetime,” says Todd S. Unger, a tax lawyer in Mount Laurel, N.J.
In a similar vein, Sarah Knight, a tax accountant in the Denver office of CBIZ MHM, a business services company, says when clients’ offers are accepted, “we get the monkey off their backs.” But the hoops the IRS sometimes makes applicants jump through can still be “painful,” she added, and the process can take time because the agency has up to two years to decide whether to accept an offer.
“When the process takes 12, 18, 24 months for a relatively straightforward offer, it’s challenging,” she said.
If the agency does not meet that 24-month deadline, the offer is deemed accepted. Until then, the IRS can look at whether a taxpayer’s ability to pay has improved since the offer was made, Knight added.
The easing of agency criteria for such offers has come in the last few years. In 2012, the IRS changed the way it calculated how much income has to go to repayment. Last year, the formula for figuring the worth of assets, which must also go toward a payment of back taxes. was liberalized.
“There’s probably never been a better time” to make such an offer, Unger said. He said he saw reasonable offers, particularly ones in which the government was forgiving less than $50,000, being accepted “pretty consistently.”
The IRS does not offer a golden formula that pegs a successful offer to a percentage of assets or income, but says in its booklet, “Offer in Compromise,” that “the ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS.”
The key seems to be offering what the taxpayer can pay, not how much is owed. Even then, employees at some IRS offices may have different outlooks from those at others, and reject more offers, hoping the debt may be collected in the future, some practitioners said.
The fairness plea, on the other hand, can be made even when there is no doubt that all of the past-due tax could be collected from assets or future income, but that doing so would be unfair. Taxpayers seeking that relief must explain why “requiring full payment would cause an economic hardship or would be unfair and inequitable,” the agency says. They generally must pay a $186 application fee.
Along with the forms, taxpayers claiming a hardship or doubt that a debt can be collected must submit some money, as well as the fee, with the application. The IRS requires payment of 20 percent of the amount offered, or, if an installment plan is being proposed, the agency will want the first payment immediately, with subsequent payment continuing while the offer is being reviewed.
If the offer is rejected, the IRS gets to apply the amounts paid toward the tax due. But all the payment-with-application requirements are waived if the taxpayer’s current income is no more than 2.5 times the current federal poverty level, which amounts to $29,172 for an individual or $59,628 for a family of four.
An offer to the IRS based on doubtful liability hinges on narrow grounds that the amount assessed is incorrect. But the IRS makes clear that an offer in compromise based on doubt about liability is not a substitute for an interpretation or challenge to tax law that would, if decided in the taxpayer’s favor, wipe out the debt. “You must offer more than zero,” it warns, or else consider alternatives to the offer in compromise.
The procedure for making such an offer is different from that of the other types of offers. The taxpayer doesn’t need to submit the $186 fee or send any payment.
All three kinds of offers are restricted to people who actually filed returns. And offers can’t be made in cases that have been turned over to the Justice Department or to a judgment for unpaid taxes or a court-ordered payment.