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Why might someone with tax debt propose an offer in compromise?

On Behalf of | Oct 2, 2023 | Tax Law

There are numerous reasons other than intentional fraud that someone could fall significantly behind on their federal income taxes. Perhaps they allowed their spouse to handle their tax return every year and never realized how they manipulated the figures. Maybe they had a secondary stream of income or specialized investments that they did not know they were required to report.

Some people, particularly those with significant incomes or a multi-year history of making the same tax return errors, may not be in a position to pay what they owe all at once. When the Internal Revenue Service (IRS) discovers that someone has underpaid their taxes, the agency may recommend the case to federal prosecutors.

The IRS can also assess sizable financial penalties in addition to any actual past-due taxes and the interest that has accrued on that balance. Some taxpayers can avoid the worst outcome by making an offer in compromise. Why would someone facing a significant past-due tax balance want to consider making an offer in compromise before they face prosecution?

They can pay less than the full amount owed

An offer in compromise involves someone putting together a proposal for either a lump-sum payment to the IRS or a series of structured payments to bring down their past-due tax balance. The taxpayer with the outstanding debt will have to propose a plan to the IRS themselves. The IRS will then look at the amount someone owes, the value of their personal property and their current income to determine if that offer is reasonable and appropriate.

When the IRS accepts an offer in compromise, a taxpayer can potentially reduce how much they must pay the IRS while simultaneously moving their account back into good standing and reducing the likelihood of criminal prosecution. Those who know that they cannot catch up on their taxes without some kind of reduction in the amount owed may find that an offer in compromise might be the best option for their situation.

Putting a proposal together and preparing to negotiate with the IRS can both be very stressful obligations. Seeking legal guidance when proposing an offer in compromise could significantly increase someone’s chances of successfully managing their past-due tax balance.