3 reasons for the IRS to make offers in compromise to taxpayers

In the law, most things can be negotiated. This applies to criminal law as well as civil lawsuits. It also applies to many tax controversies involving the IRS.

Taxpayers dealing with an audit may have an option to settle the matter through a process called an offer in compromise. As the name implies, an offer in compromise is a settlement agreement between the IRS and a taxpayer. The agency agrees to reduce the size of the debt, in exchange for the taxpayer paying off the remainder.

The IRS is likely to agree to an offer in compromise in three situations:

1. Doubt as to collectability. When the IRS has reason to believe that the taxpayer would ever be able to repay the full amount of the tax bill, penalties and interest, an agent will calculate the reasonable collection potential (RCP). If the RCP is equal or less than what the taxpayer offers to pay, the IRS probably will accept it.

2. Doubt as to liability. Even when the IRS assesses a taxpayer for a tax liability, there could be reason to doubt the taxpayer is truly responsible. The audit examiner may have failed to consider evidence presented by the taxpayer, or the taxpayer could have uncovered new evidence.

3. Effective tax administration. There is a third possible option when the IRS decides the tax bill can be fully collected, and the assessed tax is correct. The taxpayer may be able to show that collecting the tax would cause economic hardship, would be unfair or in violation of public policy.

Working with a tax attorney, people with tax trouble may be able to compromise with the IRS so they can move on with their lives.

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