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If you cannot fully pay your outstanding tax liabilities, there are ways to settle and compromise your tax obligations, including:

  • Offers in Compromise
  • Innocent Spouse Relief
  • Penalty Abatement

Offer in Compromise

What is an Offer in Compromise?

An Offer in Compromise is a contract between a taxpayer and the IRS to settle an outstanding tax debt for less than the full amount owed. The program provides eligible taxpayers with a “fresh start” and a path for paying off their tax debts. Submitting an application for an Offer in Compromise does not ensure that the IRS will accept the offer or agree to reduce your tax liabilities. The most recent statistics published by the IRS show that Offers in Compromise are only accepted about 36% of the time. That is why you need the experience of the competent tax professionals and attorneys of the Business Law Group to ensure your Offer in Compromise has the best chance of success.

When can the IRS Settle My Taxes?

The IRS can only accept an Offer in Compromise if you qualify under one of the following three circumstances:

  • Doubt as to Collectability: The IRS agrees that the taxpayer’s outstanding tax balance could never be paid in full from the taxpayer’s assets or financial circumstances. The taxpayer does not have sufficient value in their assets that could be seized and sold. The taxpayer does not have sufficient income to ever pay off the full tax debt over time.
  • Doubt as to Liability: The IRS recognizes that the total amount of the taxes owed may be incorrect for some reason. The IRS examiner may have applied the incorrect law or denied appropriate deductions. Additional evidence may have been discovered to affect the tax liability.
  • For Effective Tax Administration: This is a special category that allows the IRS to compromise a valid tax if special circumstances indicate that collection of the tax would create an economic hardship or would be unfair or inequitable. This is a very difficult burden to meet.

How to Submit an Offer in Compromise

To submit an Offer in Compromise, the taxpayer must complete several specific forms and provide detailed financial information, accompanied by supporting documentation. When the Business Law Group prepares an Offer in Compromise, we also perform and include appropriate legal analysis and argument, and supplemental disclosures as appropriate. When preparing an Offer in Compromise, beware of potential hazards. Providing the IRS with detailed information, such as assets and bank account details, can lead to collection actions. To enhance acceptance chances and minimize risks, enlist the help of a skilled tax professional or attorney.

The amount of your offer must equal the minimum amount the IRS believes they will be able to collect from you. The calculation generally includes 80% of the value of your assets, plus your excess monthly income as measured over either 12 or 24 months, depending on the type of offer made.

If your Offer in Compromise is accepted, there are a number of things to keep in mind:

  • You will be required to pay a deposit equal to 20% of the total offer amount when the offer is submitted, unless you qualify for low-income relief
  • The IRS will keep any tax refund you would otherwise be entitled to receive during the calendar year in which the offer is accepted – which can be mitigated to some degree through effective tax planning in advance
  • You will be required to timely file all necessary tax returns and remain fully compliant with your tax obligations for a minimum of five years after the Offer in Compromise is accepted. If you fail to remain compliant, the IRS can void your Offer in Compromise and resume collection activity
  • All IRS collection activities will stop while the Offer in Compromise is being considered and during any periods the Offer in Compromise is in effect. However, the statute of limitations for collecting the taxes is also suspended while the Offer in Compromise is being considered, plus an additional year

Common Forms

  • IRS Form 2848
  • IRS Form 433-A (OIC)
  • IRS Form 433-B (OIC)
  • IRS Form 656 Booklet

Innocent Spouse Relief From Taxes, Interest, and Penalties

What is Innocent Spouse Relief

A request for innocent spouse relief may relieve you of personal responsibility for taxes, interest, and penalties from a joint tax return if your spouse, or your former spouse, improperly reported items or omitted items. If the request is granted, the tax, interest, and penalties that qualify for relief are no longer your responsibility and can only be collected from your spouse or former spouse. You will remain liable, however, for any tax, interest, and penalties that do not qualify for relief and the IRS may collect these amounts from either you or your spouse (or former spouse).

Joint Return Means Joint Liability

Many married taxpayers choose to file a joint tax return for the benefits it provides. In doing so, both spouses become jointly and severally liable for the tax and any interest or penalties that arise from the joint tax return. Even if they later divorce, each person remains legally liable for the entire tax liability before the IRS. A divorce decree may obligate one party to pay the tax debt, but the IRS may still collect all tax, interest, and penalties from a joint tax return from either taxpayer.

Three Types of Relief

In certain cases, a spouse or former spouse can get relief from being jointly and severally liable for a joint tax return. The three types of relief include:

  • Innocent Spouse Relief provides relief from taxes, interest, and penalties arising if your spouse or former spouse failed to report income, reported income improperly, or claimed improper deductions or credits.
  • Separation of Liability Relief is when the IRS separately allocates tax obligations between former spouses, with each taxpayer responsible for that share of the taxes and associated penalties and interest allocated to each of them.
  • Equitable Relief may be granted when you do not qualify for either innocent spouse relief or separation of liability concerning something not reported on a joint return that is generally attributable to your spouse or former spouse.

Do You Qualify for Innocent Spouse Relief?

To qualify for innocent spouse relief, you must satisfy all of the following conditions:

  • You must have filed a joint tax return that has an understatement of tax that is solely attributable to your spouse’s erroneous item. This could be income received by your spouse but omitted from the joint return. It could also include deductions or credits incorrectly claimed on a return
  • You must establish that at the time you signed the joint return that you did not know and had no reason to know that the joint tax return resulted in an understatement of tax
  • You must convince the IRS that after taking into consideration all of the facts and circumstances, it would be unfair to hold you liable for the understatement of tax

In most cases, you must request innocent spouse relief no later than two years after the IRS first attempts to collect the tax from you.

Should I Have Had Reason to Know About an Understatement of Tax?

One of the hardest aspects of obtaining innocent spouse relief is establishing that you did not know and had no reason to know of the tax understatement. In making this determination, the IRS will consider all the relevant facts and circumstances, which may include:

  • The nature of the erroneous item and its amount in relation to other items on your tax return
  • Your financial situation, and that of your spouse or former spouse (i.e., how well were you living and was in reasonable based on the information shown on your tax return)
  • Your educational background and business experience
  • The extent of your participation in the activity that resulted in the erroneous item
  • Whether the erroneous item represented a departure from a recurring pattern on prior tax returns (for example, did your joint tax return omit income from an investment reported on prior year’s returns)
  • Whether you asked or failed to ask about the erroneous item before signing the joint tax return

Caution – The IRS Must Contact Your Spouse or Former Spouse

By law, if you request innocent spouse relief, the IRS must contact your spouse or former spouse. There are no exceptions, not even for victims of spousal abuse or domestic violence.

The IRS will inform your spouse or former spouse that you have requested innocent spouse relief, and will allow him or her to participate in the process.

The IRS will protect your privacy by not disclosing certain personal information, such as your current address, current name (if different), phone numbers, or employer. However, certain information contained in your request may be disclosed.

How to Qualify for Separation of Liability Relief

You may qualify for separation of liability relief if you filed a joint tax return and meet one of the following requirements at the time of your request:

  • You are divorced or legally separated from the from the spouse with whom you filed the joint return
  • You are widowed
  • You have not been a member of the same household as the spouse with whom you filed the joint return at any time during the 12-month period before the date of your request

If you had actual knowledge of the item giving rise to the understatement of tax at the time you signed the joint return, you do not qualify for separation of liability relief.

What is Equitable Relief?

If you can establish that it would be unfair to hold you personally liable for a joint tax obligation, the IRS may grant you equitable relief, even if you do not qualify for innocent spouse relief or separation of liability relief. In considering your request, the IRS will consider all of the facts and circumstances.

Common Forms

  • IRS Form 8857

Tax Penalty Abatement

The IRS imposes numerous penalties as a means of encouraging compliance with the tax laws. In fact, there are more than 140 different penalties, such as:

  • Failure to file penalties for failing to timely file a return
  • Failure to pay and underpayment penalties for failing to timely pay the full tax when due
  • Accuracy-related penalties, such as negligence penalties and substantial understatement of income penalties
  • Tax fraud penalties
  • Criminal tax penalties

Most penalties are automatically assessed by the IRS’s automated system without any consideration of the underlying reasons for the taxpayer’s inability to fully comply with the tax laws. However, if the taxpayer can establish “reasonable cause” for the failure, the IRS is often willing to abate some or all of the penalties. The most currently released statistics show that approximately 33% of all penalties assessed are later removed for reasonable cause.

Common Forms

  • IRS Form 2848
  • IRS Form 843

You Don’t Have To Do This Alone!

Call the Colorado Tax Professionals and Attorneys at the Business Law Group at (719) 355-8840. This content does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.