Tax and financial advice from the Silicon Valley expert.

Can your unpaid federal tax bill be reduced or cancelled?

Yes, there is some truth to those commercials you have seen on television. In some cases the IRS can reduce or cancel an unpaid federal tax bill.

The name of the procedure for this reduction is an offer in compromise.

In the past, offers in compromise have been very time-consuming and were rarely accepted. More recently, the IRS has adopted a “fresh start” initiative to speed the processing of offers in compromise and to make qualifying easier. Scott Reisher, director, collection policy, IRS Small Business/Self-Employed Division recently said in a webcast that the IRS accepted 27% of offers in 2010, 34% in 2011, and is accepting 80% more offers in 2012 (about 61%!).

(CCH Federal Tax Day – Current, M.2, IRS Accepting More Offers-in-Compromise, Collection Official Says, (September 6, 2012).)

The reason is probably for the IRS to “clean up its books” for bad debts from people suffering from the slow economiy.

The IRS will compromise liabilities when
(1) there is a doubt as to the existence or amount of the tax liability;
(2) there is a doubt that the total amount can be collected; or
(3) there is no doubt as to the liability or collectibility, but compromise would promote effective tax administration because either collection of the liabiity would create economic hardship or compelling public policy or equity considerations provide a sufficient basis for compromising the liability.

(Treasury Regulations Section 301.7122-1)

The IRS changed the financial analysis used to determine which taxpayers qualify for an offer in compromise, as follows.
* Revised the calculation of the taxpayer’s future income. The IRS will look at only one year (instead of four years) of future income for offers paid in five or fewer months; and two years (instead of five years) of future income for offers paid in six to 24 months. (24 months is the maximum payoff period.)
* Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer’s post-high school education, as part of the living expenses allowed when computing income available for tax payments.
* Monthly payments for delinquent state and local taxes may be allowed in certain circumstances.
* Expanding the Allowable Living Expense allowance, including allowing credit card payments, bank fees and charges.

(IRS Summertime Tax Tip 2012-02.)

You can find the Offer in Compromise form, Form 656, and instructions at the IRS web site,

Extensive financial disclosure is required.

There is a $150 filing fee, which can be waived for economic hardship. A nonrefundable deposit of 20% of the total offer amount must be paid when the offer in compromise form is submitted.

In most cases, it make sense to hire a professional tax advisor to prepare and assist with processing the offer in compromise. These professionals speak the same language as the IRS and can help assure you are providing information that is required, reducing delays. Yes, the fees will be substantial for this help.

If you would like our help in preparing an offer in compromise, call Michele Brantley at 408-918-3162 to make an appointment for an in person or telephone meeting with Michael Gray, CPA.

Tax and financial advice from the Silicon Valley expert.