The Internal Revenue Service has introduced a new tool for determining a taxpayer’s eligibility for an offer in compromise that can help lower the taxpayer’s outstanding tax debts.
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The IRS’s new Offer in Compromise Pre-qualifier tool helps tax practitioners determine a taxpayer’s eligibility for an offer in compromise and calculates a preliminary offer amount before they start on the paperwork. An offer in compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.
The online tool asks information such as the taxpayer’s ZIP code, state, county, the total number of members of their household, including those over age 65, and the total IRS tax debt, along with the most recent tax year they are requesting to compromise. It begins by asking if the taxpayer is in an open bankruptcy proceeding, has filed all of the required federal tax returns, made all of the required estimated tax payments, and submitted all of the required federal tax deposits if they are self-employed or have employees. The tool also requests information on the taxpayer’s assets, income and expenses, and leads to a proposal.
Last year, the IRS expanded its Fresh Start initiative to offer more help to unemployed and financially stressed taxpayers (see IRS Expands Help to Struggling Taxpayers). Those efforts included streamlined procedures for both installment agreements and offers in compromise. The IRS now has more flexibility with financial analysis for determining reasonable collection potential for distressed taxpayers.
However, an offer generally will not be accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. The IRS first examines a taxpayer’s income and assets before making a determination regarding the taxpayer’s ability to pay.
A report last year by the Treasury Inspector General for Tax Administration found that the IRS is having trouble coping with an enormous backlog of requests for offers in compromise from taxpayers who are struggling with the tough economy (see IRS Overwhelmed by Requests for Offers in Compromise). The number of requests for offers increased by 28 percent between fiscal years 2007 and 2011. At the same time, the resources available at the IRS to work on the offers have decreased, creating an inventory backlog and delaying responses to taxpayers. The new OIC pre-qualifier tool could help the IRS reduce this backlog by encouraging taxpayers and tax practitioners to do the work ahead of time to determine whether an offer in compromise is worth pursuing.
For more information on offers in compromise, see the IRS’s Form 656 Booklet.