If a taxpayer owes a tax debt, the taxpayer can ask the IRS to settle the debt for less than the full amount. The IRS will agree to an offer in compromise only for specific reasons. Of these, the most relevant to an unemployed taxpayer with little or no income and minimal assets would be a claim that the debt is uncollectible or that compromising the debt would promote effective tax administration because collection of the tax would cause hardship for the taxpayer. Code Sec. 7122. See §39,920.10.
Compliance Note
A taxpayers submits an offer in compromise by filing Form 656. Financial information must also be submitted on Form 433-A or Form 433-B. If the taxpayer is claiming hardship, the taxpayer must include a written narrative explaining the special circumstances and why paying the tax liability in full would create an economic hardship and attach any supporting documents.
If a taxpayer offers a compromise based on doubt as to collectibility, the IRS will consider the offer if the taxpayer’s assets and income are less than the full amount of the assessed liability. The IRS generally will not accept an offer, however, that is in an amount less than the taxpayer’s reasonable collection potential, which is the amount that can be collected from all available means, including administrative and judicial collection remedies. In making this determination, the IRS takes into account the taxpayer’s assets and income, as well as amounts collectible from third parties and amounts available to the taxpayer but beyond the reach of the IRS. IRM (April 30, 2015). The standard practice of the IRS has been to judge an offer amount based on the taxpayer’s income from prior years, but the IRS has allowed greater flexibility for its employees to consider the taxpayer’s current and future income. The IRS may require, however, that a taxpayer entering into such an offer in compromise agree to pay more if the taxpayer’s financial situation improves significantly. IRS News Release IR-2010-29. The IRS also offers additional review of home values for offers in compromise in cases where real-estate valuations may not be accurate. For further discussion of offers in compromise based on doubt as to collectibility, see §39,920.10b.
Even if the taxpayer has sufficient assets to pay the tax debt, the taxpayer may submit an offer in compromise if collection of the debt would cause hardship. The IRS’s determination of whether to accept the compromise be based on the taxpayer’s individual facts and circumstances. If the IRS accepts an offer in compromise, failure to make payments under the agreement may cause the agreement to be cancelled. However, the IRS has announced greater flexibility for taxpayers who miss a payment if the cause is a job loss or other financial hardship.
For further discussion of offers in compromise, see §39,920.