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The
authority of the government to compromise a tax liability is
described in Internal Revenue Code Section 7122. In short, the IRS
may settle a liability at a reduced level when there is doubt
regarding (a) the actual tax liability, (b) the collectibility of the
debt, or (c) collection of the debt would create a hardship on the
taxpayer. An offer in compromise ("offer") is available to
compromise almost any type of tax and to businesses and individuals
alike. The most common offer in compromise is based on doubt
regarding collectibility of the tax liability. Such an offer should
be based on an analysis of net equity and future earning power of the
taxpayer, taking into consideration the amount of tax that the IRS
could otherwise collect through enforced collection procedures. If it
can be demonstrated that the amount of tax collectible through an
"offer" is greater than the amount collectible through
enforced collection (including liquidation of assets), the offer
should be accepted. On the other hand, if such an advantage to the
IRS cannot be demonstrated, the "offer" should be rejected.
In
addition the taxpayer must be in full compliance, i.e., all tax
returns must be filed and up to date. In the case of a business,
payroll tax returns must not only be current at the time the "offer"
is submitted but must have been filed on time and paid for at least
the two tax quarters preceding the filing of the "offer".
The
amount of the "offer" is always a critical question, and
involves evaluation of a number of factors in connection with (1) the
net equity of the taxpayer’s assets, and (2) monthly income of the
taxpayer, less reasonable and necessary expenses over a period of 60
months.
Strategic
planning and creativity is very often necessary in order to
facilitate the acceptance of an "offer" in compromise at
the lowest amount allowed by law.
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