Settling and Reducing IRS Tax Debt
Individual | September 30, 2014
Any mention of past due taxes or the Internal Revenue Service often invokes panic in people. However, such a panicked response need not occur. If you owe back taxes to the Internal Revenue Service, an “Offer in Compromise” provides a means by which your tax bill can be reduced.
There are primarily two types of Offers in Compromise. The first type is called a “Doubt as to Liability Offer in Compromise.” Under this type, the taxpayer contests the validity of the tax owed by claiming that the tax should not have been assessed in the first place. For example, if the IRS disallows a deduction that actually should have been allowed, resulting in tax owed by the taxpayer, an Offer in Compromise under a Doubt as to Liability theory would be an effective tool to resolve the tax liability.
If a Doubt as to Liability Offer in Compromise is not appropriate, a “Doubt as to Collectability Offer in Compromise” may be a good alternative. Under this theory, the taxpayer does not dispute the tax owed, but rather requests that the IRS settle the matter for less than the total amount owed because the taxpayer cannot afford to pay the total amount. In assessing whether a Doubt as to Collectability Offer should be accepted, the IRS will look at the taxpayer’s equity in assets and net disposable income. In examining equity in assets, the IRS will generally take a quick sale value (usually 70 to 80% of the fair market value) and subtract from it any liens on the property. In examining net disposable income, the IRS will generally subtract allowable expenses (things like the cost of housing, utilities, current taxes, etc.) from gross income to determine how much income is left to pay the IRS. Generally, if the amount of available equity in assets plus the amount of net disposable income over a period of 24 months is less than the outstanding tax due, the IRS will be inclined to accept an Offer in Compromise which offers the sum of the available equity in assets and net disposable income over a period of 24 months. Consequently, an Offer in Compromise can be an effective way to reduce the amount paid to the IRS on an outstanding tax bill.
If you have a question regarding a tax issue, contact one of the experienced tax attorneys at Trinity Law today. Our attorneys routinely handle tax matters for Pennsylvania residents in York, Lancaster and surrounding counties. Contact Trinity Law at www.YourLawFirmForLife.com or at 1-886-464-5297.