Wednesday, November 7, 2007

Let's Settle This: Part 1 of 2

One of the most common questions I am asked when taxpayers call in is, "Can I just settle with the IRS and pay them a lump sum?" You see, taxpayers hear promises of reducing their total liability and settling for "pennies on the dollar." Advertisements on the radio and television make this sound like a slam dunk move with no defenders in site. NOT TRUE. In fact, "settling" with the IRS is like trying to drive to the basket while dribbling with your elbows....extremely difficult.

An agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed is called an Offer in Compromise (OIC). The IRS has the ability to settle, or “compromise,” federal tax liabilities by accepting less than the full payment under certain circumstances. A tax debt can be legally compromised if there is doubt that the assessed tax is correct, if there is doubt that the tax payer could ever pay the full amount of tax owed, or if there is serious economic hardship or other exceptional circumstance which warrants acceptance of less than full payment of the taxes owed. Again, simply not a slamdunk.

Approximately 25% of the offers received in 2006 were actually accepted by the IRS. While this number seems high, it is rather misleading, because the number of offers received has actually decreased over the last 3 years due to a tougher screening process and requirement of nonrefundable payments that must accompany the offer when it is submitted. So while a higher percentage of offers are being accepted in 2006, there are fewer offers that are actually being received.

The OIC process is complex and very time-consuming. What may seem like a quick solution can actually take up to 18 months to resolve. During this time period, the liability continues to grow with penalties and interest, and the statutory time within which the IRS may engage in collection activities is suspended. It will be further suspended if the OIC is rejected by the IRS and the taxpayer tries to appeal the rejection. So in essence, an OIC may not be an option for you and should not be seen as the "Break Glass in Case of Emergency" solution to your tax problem.

Settle's Settle This: Part 2


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