If the IRS is after you to collect a tax liability that is beyond your capacity to pay, you should be aware of a technique that may allow you to settle your tax debt for less than the full amount you owe. It's called an Offer in Compromise.
Like any creditor, IRS prefers a partial payment to no payment at all. Thus, IRS is sometimes willing to settle a tax liability for less than the full amount if:
the taxpayer is unable to pay the full amount;
there is doubt as to how much the tax liability is;
collection of the liability would create economic hardship for the taxpayer (such as where the taxpayer is out of work due to health problems, or where sale of assets to pay the tax would leave the taxpayer without enough money to meet basic living expenses), or
compelling public policy or equity considerations exist, and due to the exceptional circumstances IRS's collection of the full liability would undermine public confidence that the tax laws are being fairly and equitably administered. Exceptional circumstances for this purpose might include situations where a taxpayer relies on erroneous advice from IRS, or a medical condition prevents a taxpayer from managing his financial affairs.
The taxpayer starts the settlement by making an Offer in Compromise by filing Form 656. Working with your tax advisor is imperative to this process as submitting an offer can be lengthy and tedious. The taxpayer’s financial information is usually required to be submitted along with the offer.
To qualify for an Offer in Compromise, a taxpayer must have filed all required tax returns to be eligible and also must make all required estimated tax payments for the current year. The taxpayer will not be eligible if they are in an open bankruptcy proceeding.
While no one hopes to be tied up in a situation where they can’t pay their tax liability, if the situation should arise The Tax Warriors® at Drucker & Scaccetti have the knowledge and experience to help taxpayers work through it. Call on us if you find yourself in this predicament and we will use our expertise to assist you in efforts to mitigate adverse consequences and related stress.