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How To Establish Effective Tax Administration Grounds For An Offer in Compromise

Posted By Jin Kim in Tax Law
How To Establish Effective Tax Administration Grounds For An Offer in Compromise

No one wants to pay a debt in full.  That's why chapter 7 bankruptcy is a popular option when all assets can be protected and the petitioner qualifies with low income. In general, the petitioner in a "no-asset" chapter 7 bankruptcy erases their general unsecured debt (like credit cards), keeps their property, and receives a fresh start at minimal expense.  However, taxpayers who don't qualify for bankruptcy or have non-dischargeable tax debt have only a few debt relief options. These taxpayers can get non-collectible status with the IRS if they have minimal income and assets, pay the amount owed over time through an installment agreement, or settle their tax debt for less than the amount owed through an offer in compromise (OIC).  Out of these 3 options, an offer in compromise is a popular choice since everyone wants to pay less than the amount owed. 

Effective Tax Administration

An offer in compromise can be filed when: (1)there is doubt as to collectibility, (2) there is doubt as to liability, or (3) an OIC would promote effective tax administration.  The majority of offers in compromise are made on the basis of doubt as to collectibility as these taxpayers have insufficient income and assets to repay their full tax liability. However, even when the taxpayer has sufficient assets and income to repay their full tax liability, the IRS may accept an offer in compromise in the interest of effective tax administration when collecting the full amount owed would cause the taxpayer economic hardship or acceptance of the offer would serve public policy or equity considerations. 

Public Policy & Equity

The IRS may accept an offer in compromise when doing so promotes effective tax administration in that compromise of the liability serves compelling public policy or equity considerations.  This acceptance of an OIC based on "equitable" grounds is designed to prevent the undermining of public confidence in the fair and equitable administration of tax laws. To illustrate a situation in which acceptance of an OIC would be equitable, assume that a taxpayer relied and acted on erroneous IRS advice that resulted in a tax liability.  If the taxpayer has a history of filing tax returns and paying on time, the IRS may accept a compromise of the tax liability as doing so promotes effective tax administration in the interests of equity; after all, the taxpayer only incurred the tax liability due to erroneous IRS advice, and collection of the full liability would undermine public confidence in IRS advice and fairness in tax collection.  Similarly, if the taxpayer were in a coma for several years and thus failed to file tax returns, and the IRS filed substituted returns and assessed a tax deficiency, the taxpayer may have a basis for filing an offer in compromise on the basis of effective tax administration when they awake from the coma.   

Economic Hardship

Nearly everyone filing an offer in compromise has some degree of economic hardship; after all, they're asking the IRS to settle their tax bill for pennies on the dollar.  However, the economic hardship required by Treasury Regulations for an offer in compromise based on the effective administration of taxes are generally found in (but not limited to) 3 instances: 

"(A) Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayer's financial resources will be exhausted providing for care and support during the course of the condition; 

(B) Although taxpayer has certain monthly income, that income iexhausted each month in providing for the care of dependents with no other means of support; and 

(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses."

          26 CFR § 301.7122-1 – Compromises 


Those instances are not the only cases in which an offer in compromise can be submitted due to economic hardship, but they illustrate the common theme for OIC's based on economic hardship; the taxpayer's income and assets are only sufficient to provide for their necessary living expenses or those of their dependents who have no other means of support.  

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About the Author:

Jin Kim

The Tax Law Office of Jin Kim helps clients achieve tax relief through offers in compromise, installment agreements, and non-collectible status.  In many cases, she represents clients with tax debt against the IRS, CDTFA, and FTB.  In addition to her tax relief practice, she also maintains audit defense and cannabis taxation practices.  ... View full business profile here: Jin Kim

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