The IRS Offer in Compromise program presents taxpayers with a viable option to settle tax debts for an amount less than what is owed. The program has been around for quite some time and, as with everything when it comes to the IRS, there are a number of nuances.
The IRS has developed numerous procedures around the offer in compromise program. One has to understand these procedures to understand how to fully benefit from the offer in compromise.
The IRS’s offer program offers three types of offers that can be submitted for consideration. In Eberhardt v. Commissioner, T.C. Summary 2004-147, the court discussed each of these offer types, providing a comprehensive understanding of how the IRS and courts assess these offers. Therefore, this case serves as an excellent resource for taxpayers who want to learn more about the Offer in Compromise program and the different types of offers available under it.
Facts & Procedural History
The Eberhardts 1995 Form 1040, U.S. Income Tax Return, reported medical expense deductions and a pension-related casualty or theft loss.
The IRS audited the return and proposed to disallow the medical expense deductions and the pension-related casualty or theft loss and the case was closed to the IRS Office of Appeals. IRS Appeals disallowed the medical expense deductions and the pension-related casualty or theft loss and issued a statutory notice of deficiency. The Eberhardts filed a petition with the U.S. Tax Court, which sided with the IRS. The IRS began collections efforts following the court proceeding, which included issuing a final notice of intent to levy.
The Eberhardts requested a collection due process hearing and submitted an offer-in-compromise for $1,000 based on doubt as to liability, doubt as to collectibility, and effective tax administration. The IRS did not accept the offer-in-compromise and the Eberhardts asked the U.S. Tax Court to review the denial.
Doubt as to Liability Not Considered Twice
When the IRS assesses a tax liability against a taxpayer, the taxpayer has the right to dispute the accuracy of that assessment. If the taxpayer believes that the assessed tax liability is incorrect, they can challenge it through various administrative and judicial procedures.
If, after exhausting those procedures, the taxpayer still believes that the assessed tax liability is incorrect, they may be eligible to make an OIC based on doubt as to liability. This means that the taxpayer believes there is a genuine dispute as to whether the assessed tax liability is correct, and they are willing to offer a compromise settlement amount to resolve the dispute.
To be eligible for an OIC based on doubt as to liability, the taxpayer must provide evidence to support their belief that the assessed tax liability is incorrect. The IRS will then evaluate the evidence and make a determination as to whether there is a genuine dispute. If the IRS agrees that there is a doubt as to liability, it may be willing to accept the taxpayer’s offer of compromise to settle the dispute.
In the Eberhardts’ case, the IRS did not consider the offer-in-compromise based on doubt as to the tax liability. It noted its policy of not considering this type of offer when the liability was established by the courts. The Eberhardts’ tax liability was previously considered by IRS Appeals and by the U.S. Tax Court.
The Eberhardts challenged the IRS’s policy. The tax court agreed with the policy, noting that doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the liability.
Doubt as to Collectibility Was Not Satisfied
An OIC based on doubt as to collectibility is a type of OIC that allows a taxpayer to settle their tax liability for less than the full amount owed when they are unable to pay the full amount due to financial hardship or other reasons.
To be eligible for an OIC based on doubt as to collectibility, a taxpayer must demonstrate to the IRS that they cannot pay the full amount of the tax liability owed, either in a lump sum or through an installment agreement, and that there is doubt as to whether they can pay the full amount in the foreseeable future.
To support their request for an OIC based on doubt as to collectibility, a taxpayer must provide the IRS with detailed financial information, including income, expenses, assets, and liabilities. The IRS will then evaluate the taxpayer’s financial situation to determine their ability to pay the full amount of the tax liability owed.
If the IRS determines that the taxpayer is unable to pay the full amount of the tax liability owed, it may be willing to accept an OIC to settle the debt for less than the full amount. The taxpayer must make an offer of compromise that reflects their ability to pay and the amount that the IRS could reasonably expect to collect from them in the future.
In the Eberhardts’ case, the IRS reviewed the offer-in-compromise based on doubt as to collectibility. The IRS evaluated the Eberhardts reasonable collection potential and concluded that they could pay the entire liability within a reasonable period of time. Both Mr. and Mrs. Eberhardt were employed and their monthly income exceeded their allowable monthly expenses.
The Eberthardts challenged the IRS’s determination. The U.S. Tax Court agreed with the IRS, upholding the IRS’s evaluation and application of its collection standards.
Effective Tax Administration Not Warranted
An OIC based on effective tax administration is a type of OIC that is available when there is no doubt as to the accuracy of the assessed tax liability and the taxpayer has the ability to pay the full amount owed but paying the full amount would cause economic hardship or would be unfair or inequitable.
To be eligible for an OIC based on effective tax administration, a taxpayer must demonstrate to the IRS that paying the full amount of the tax liability owed would create an economic hardship, or that there are exceptional circumstances that would make it unfair or inequitable to enforce collection of the full amount owed.
Examples of economic hardship might include situations where the taxpayer is unable to meet basic living expenses such as housing, food, and medical care. Examples of exceptional circumstances might include situations where the taxpayer has a serious illness or disability, or where the collection of the tax liability would cause extreme hardship or harm to the taxpayer or their family.
To support their request for an OIC based on effective tax administration, a taxpayer must provide the IRS with detailed financial information, including income, expenses, assets, and liabilities, as well as information about any extenuating circumstances that would make it unfair or inequitable to collect the full amount owed.
If the IRS determines that the taxpayer meets the eligibility requirements for an OIC based on effective tax administration, it may be willing to accept an offer of compromise to settle the debt for less than the full amount. The taxpayer must make an offer of compromise that reflects their ability to pay and the amount that the IRS could reasonably expect to collect from them in the future.
In the Eberhardts’ case, the IRS reviewed the offer-in-compromise based on effective tax administration. The IRS concluded that the Eberhardts could pay the full amount of the liability by making monthly payments and still pay for their reasonable living expenses. The U.S. Tax Court considered the following factors in concluding that there was no economic hardship in this case:
- Whether the taxpayers were capable of earning a living because of a long-term illness, medical condition, or disability, and it is reasonably foreseeable that taxpayers’ financial resources would be exhausted providing care and support during the course of the condition;
- Although taxpayers have a certain monthly income, whether that income is exhausted each month in providing for the care of dependents with no other means of support; and
- Although taxpayers have certain assets, whether the taxpayers are unable to borrow against the equity in those assets or liquidation of those assets to pay outstanding tax liabilities.
The Eberhardts claimed that they could not pay the tax in full because they had a substantial amount of short-term debt, the expenses of deferred maintenance on their home, and the need to fund their retirement savings over a limited number of years. The court concluded that this did not rise to the level of financial hardship.
This case offers a comprehensive view of the IRS’s Offer in Compromise program and the different types of offers that taxpayers can submit. It’s important to note that offers based on doubt as to liability cannot be submitted if the IRS or the courts have already considered the issue. Moreover, the IRS closely scrutinizes the financial circumstances when reviewing other types of offers. It’s worth noting that the inability to save for retirement, even when the taxpayer is close to retirement age, is generally not considered sufficient grounds to qualify for an offer.