For those who have a deficiency with the IRS, often the question is what are the options. Failing to address a deficiency with the IRS can result in liens on your assets, a sweep of your bank account and/or the garnishment of your wages. Assuming the time period to appeal the amount due has passed; taxpayers have two options available to resolve a tax deficiency, an Installment Agreement or an offer In Compromise.
An offer in Compromise is an agreement between the taxpayer and the IRS that will settle the deficiency with a payment for less than the full amount owed. In most cases the IRS will not accept less than the full amount owed, and in order to accept such an offer, the IRS must be satisfied that the amount offered is equal to or greater than their reasonable collection potential. there are three grounds for submitting an offer in compromise:
1. Doubt as to Collectability. There is doubt as to whether the IRS will be able to collect the deficiency from the taxpayer.
2. Doubt as to liability. there is doubt as to whether the tax assessment is correct, which can arise in circumstances where an examiner was mistaken in interpreting the law or perhaps the taxpayer has new evidence.
3. Exceptional Circumstances. this is a very high standard and the taxpayer must establish that collection of the tax would create an economic hardshipor would be unfair or inequitable.
In order to apply for an offer In Compromise, a taxpayer must submit financial information to assist the IRS in evaluating the taxpayer’s reasonable collection potential. In addition, the taxpayer must pay a minimum of 20% of their offer if the offer is to pay in less than 5 installments, or the amount of their first proposed payment if the offer is for more than 5 installments. this payment is applied to the liability regardless of whether the offer In Compromise is accepted or denied. the IRS has strict guidelines for allowable expenses in determining a taxpayer’s ability to pay the deficiency, and it is important that a taxpayer understand these allowable expense amounts prior to submitting their offer, otherwise their offer may be immediately rejected, with the IRS retaining the down payment required with the offer submission.
The alternative is an Installment Agreement, which is the taxpayer’s agreement to pay the full amount due to the IRS in installment payments. there are two methods to apply for an Installment Agreement. If the amount of the total deficiency, including interest and penalties, is less than $25,000.00, there is an on-line application process at IRS.gov to submit an installment agreement request. In the event the deficiency exceeds $25,000.00, you may still qualify for an installment agreement, but the taxpayer is required to submit detailed financial information with their request.
Although entering into an installment agreement will delay any collection activities (provided installment payments are made timely), interest on the deficiency will continue to accrue until the amounts
are paid in full under the installment arrangement.
One last note, anytime you are submitting financial information to the IRS, you are telling them how to collect on their liens. Generally if you are proceeding to a settlement, either via an Offer In Compromise or Installment Agreement, they will not use that information for
collections, but if you do not complete the process, you have provided the IRS a roadmap of your assets for the collection process.
If you have any questions regarding a tax deficiency and exploring your options, please contact our Tax Department for more information.
