Can tax litigation help when an offer in compromise fails?

If a taxpayer receives a letter from the Internal Revenue Service regarding an alleged tax debt, is there any hope for settlement?

As an attorney that focuses on tax law, I know that tax litigation is sometimes the best forum for challenging a tax controversy, especially when a settlement is unlikely. The official criteria by which the IRS might accept a settlement offer, called an offer in compromise, include the taxpayer’s ability to pay, his or her income and expenses, and asset equity. For example, if the IRS believes it might be able to collect more than the offered amount within a reasonable time, it might reject an offer in compromise. 

Admittedly, an offer in compromise can be a great outcome. In exchange for paying less than the full amount of the alleged tax debt, an individual will see any tax liens removed and get a fresh start. However, there are other options for taxpayers who want to dispute a tax obligation and/or cannot pay a tax debt.

First, federal law requires due process. That means that the IRS cannot initiate collection activity without giving a taxpayer notice, as well as an opportunity to contest the alleged tax debt. In fact, due process might even be utilized as a litigation strategy, as litigation is a slow process and can buy a taxpayer months or even years of time.

Yes, there is a potential risk in the event of an unsuccessful lawsuit, as interest and fines may continue to accumulate. However, a strong showing at court may persuade IRS officials to settle for a reason not listed on their offer in compromise website: litigation hazards. Specifically, if IRS officials fear they might lose at court, they may accept an offer on the eve of trial that they would have otherwise rejected at the offer in compromise stage.

Source: FindLaw, “Ten Things to Remember When You Owe the IRS,” copyright 2015, Thomson Reuters

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