The IRS offers a program to taxpayers that allows for an individual who is unable to pay the full amount of tax debt owed to pay a lesser amount that settles the debt in full. This program is called the Offer in Compromise program and is available to those who meet certain criteria. However, if you have a legitimate doubt about the amount you owe in tax debt, you will need to go through a different process than making a traditional offer in compromise. This process should only be done if you have legitimate and provable concerns about how much is owed.
In the event that you owe more than you believe is accurate, you will need to submit an offer in compromise (doubt as to liability). You can do so by completing IRS Form 656-L, which allows you to dispute the amount of tax debt that is owed. When you complete and submit this form to the IRS, the process of review will begin. IRS officials will carefully evaluate the information you’ve sent and review your application to determine if an error was made in calculating your tax debt.
If the tax debt you owe has been established by a judgment in a court of law, a final court decision, or through current tax laws, it is unlikely that you can dispute the liability. However, if you have a genuine dispute about the amount of tax debt, you can submit a doubt as to liability offer to the IRS by completing the required form. You can dispute back taxes if you suspect an error was made by the IRS, your accountant, or even yourself.
In some cases, taxpayers don’t even realize they have any outstanding debt with the IRS until years after the debt has been assessed. One example is a taxpayer who reviewed their credit report, only to find that the IRS had imposed $25,000 in back taxes due to an audit on a previous tax year. The taxpayer may not have received information about the audit, resulting in the IRS assessing the penalty due to no response. In this case, the taxpayer may choose to file Form 656-L because they don’t think the IRS performed an accurate audit.
In the offer, the taxpayer would have to offer at least $1 — as the amount offered cannot be $0 — and include any receipts and other supporting documentation for the audit. If the documentation substantiates the claim that the tax debt owed is not accurate, the IRS would accept the offer and settle the debt.
Another example may apply if you rely on the services of an accountant to handle the tax preparation process on your behalf. You may change accountants partway through the process because the first accountant is making errors on your taxes, resulting in a substantial amount of taxes owed. Your new CPA recommends making an amendment of your taxes, but the IRS doesn’t process the request. You could end up with a tax debt with the IRS for the original amount, even if it was an error.
In this case, you would also qualify to file a doubt as to liability form, which would begin the review process with the IRS. You would need to include the documentation submitted through the amendment process, as well as proof that you submitted the amendment prior to the tax deadline. In your offer, you would include the corrected amount of taxes owed as the settlement amount. If the IRS determines that you are correct, it would accept the settlement.
Every offer in compromise must be well-supported with any applicable documentation. You may need to prepare and send the following:
Additionally, your offer in compromise submission must include an actual offer. As mentioned, an offer made due to doubt as to liability cannot be $0, but if you believe the tax debt is fully inaccurate, you could offer $1 as a settlement. If you need to make a correction to the amount owed due to an error in the tax filing or a change in the tax laws, you would submit an offer with the correct amount owed.
The IRS reviews an offer in compromise with two main objectives. The first is to determine whether an error was made in processing the amount of taxes owed. The second is to determine how easily the IRS could collect the full amount from you, the taxpayer. If an error was made and you have supplied the documentation to support it, the IRS is more likely to accept your offer.
However, if officials do not agree that an error was made and they believe you do owe the full amount, they will assess whether they can collect the full amount from you in a reasonable amount of time. The IRS can turn the process of enforced debt collection to the Department of Treasury. This department can garnish wages, tax refunds, and other funds to collect your debt.
However, the IRS will look at your assets and living expenses in order to determine whether you are able to pay the debt. If the offer you make is more than what it expects to collect in a reasonable timeframe, it may accept.
If you aren’t disputing the amount of tax owed but you are unable to pay the full amount, you should not fill out Form 656-L. Instead, you will need to go through the process of submitting an offer in compromise to request the option to pay a lesser amount in exchange for payment in full. This program allows taxpayers to pay off their tax debt and enjoy a fresh financial start.
Navigating the complex world of the IRS and tax debt can be overwhelming. At Solvable, we’re here to help with personalized education and debt resolution services. If you’re struggling to know where to turn for help with your tax debt, learn more about Solvable and take the first step toward financial freedom.