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Partial Payment of IRS Debt

June 14, 2017

In the business world, when a debtor owes a creditor a specific sum of money, the latter will sometimes agree to accept less than the full amount owed, simply to conclude the matter and move forward. As the saying goes, “A bird in the hand is worth two in the bush.” Somewhat similarly,under certain circumstances, the IRS may agree to accept a partial payment of IRS debt, rather than hold out for the full amount owed. The agreement between a taxpayer and the IRS that settles the taxpayer’s liabilities for less than what is owed is called an offer in compromise (OIC) and should be handled by a tax settlement attorney.

Three Grounds for Partial Payment of IRS Debt

The IRS may accept an OIC based on three potential grounds:

  •  Where there is doubt as to liability—a compromise under this ground is available only where there is a genuine dispute as to the existence or amount of the debt.
  •  Where there is doubt as to collectiblity—here the taxpayer must be able to show that he or she has inadequate assets or income to pay the full amount over some extended period of time.
  •  Where the IRS determines that “effective tax administration” justifies accepting the compromise—under this ground, the tax is legally owed and the full amount owed can be collected, but the IRS agrees that requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances. Bear in mind here that if you don’t want to pay in full because to do so would affect your lifestyle, the plea to the IRS will fall on deaf ears.

Pennies on the Dollar: Is it Too Good to Be True?

Listen carefully to the radio and you’ll likely hear three or four advertisements during the day that promise that you can fully settle with the IRS with only a partial payment of IRS debt. Is partial payment of IRS debt actually possible? Well, it may be possible, but it is extremely rare. In general, the IRS not only will not—it cannot accept a settlement offer if the taxpayer can afford to pay what he or she owes. From the IRS perspective, acceptance of an OIC is a last resort. To the extent that the taxpayer can pay the liability over time, in say 60 installments, IRS rules prevent it from acceptance an OIC.

Because the IRS prefers to receive full payment, at least in installments, it requires the taxpayer complete an exhaustive disclosure of assets and liabilities before it decides to accept the offer. The IRS process often takes at least six months to complete.

Have You Filed All Returns That Are Currently Due?

When submitting an OIC, the taxpayer generally must send an initial payment—approximately 20 percent of the compromise amount. Pursuant to a rule that became effective March 27, 2017, if you submit an OIC (with the 20 percent payment) and have not filed all required back tax returns, the IRS will simply return the OIC to you, although it will keep the 20 percent payment and apply it to the total that is owed.

Forms to Use

When submitting an OIC based on doubt as to collectability or effective tax administration, taxpayers must use the most current version of Form 656, Offer in Compromise, and submit Offer in Compromise Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Offer in Compromise Form 433-B, Collection Information Statement for Businesses.

A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L (PDF), Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC). Form 656 and referenced collection information statements are available in the Offer in Compromise Booklet, Form 656-B.

Offers in Compromise: It Can Be Dangerous to Go Solo

Most taxpayers quickly realize that the IRS Offer in Compromise program is fraught with difficulties and that it makes sense to hire an offer in compromise lawyer to help determine how to settle back taxes. It is one thing to be in a tight spot with the IRS. It is another to compound the problem by going solo in order to settle IRS back taxes with the tax experts that work for the IRS.

If you can only make a partial payment of IRS debt, contact a tax lawyer at Mackay, Caswell & Callahan, P.C. today. We have more than 30 years of experience in assisting taxpayers with all sorts of tax-related issues, including the handling of back taxes and other related issues. We have offices in Albany, New York City, Rochester, Syracuse, Utica and Watertown. Don’t delay; we have a New York tax attorney ready to help you with your tax issues.

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