Should You Submit an Offer In Compromise or File an Appeal?

Offshore Account Update

Posted on October 31, 2022 |

The Internal Revenue Service (IRS) recently published a Tax Tip in which it encourages eligible taxpayers to consider an offer in compromise. As the IRS explains, this is an option for taxpayers who either “can't pay their full tax liabilities” or for whom “paying the entire balance owed would cause financial hardship.” But, while submitting an offer in compromise and settling with the IRS is one option for eligible taxpayers, it isn’t the only option that is available.

For example, some taxpayers will be better off filing an appeal. As the IRS explains in a separate publication, filing an appeal is generally an option for taxpayers who believe that:

  • The IRS has misinterpreted the law in calculating their tax liability;
  • The IRS has misapplied the law due to a misunderstanding of the facts;
  • The IRS is taking inappropriate collection action; or,
  • The IRS inappropriately denied an offer in compromise.

If you file an appeal (and your appeal is successful), this will result in the elimination of your unwarranted tax liability. This still doesn’t necessarily mean that you will be able to afford to pay what you owe, but it does mean that you won’t be paying the IRS unnecessarily. If you still need help getting out from under your tax debt after filing an appeal, then you may be able to submit an offer in compromise as well.  

Eligibility to Submit an Offer in Compromise to the IRS

There are two sets of eligibility criteria under the IRS’ offer in compromise program. The first assesses your technical eligibility to settle your federal tax debt, while the second focuses on whether you should be allowed to settle your tax debt based on your financial circumstances. To qualify for an offer in compromise, you must:

  • Be current on your federal tax filings;
  • Be current on your estimated tax payments;
  • Not currently be going through bankruptcy; and,
  • Have a valid extension for the current year (if applying for the current year).

If you meet these four technical eligibility criteria and submit an offer, the IRS will then evaluate your offer based on your:

  • Income;
  • Asset equity;
  • Expenses; and,
  • Overall ability to pay.

Common Grounds for Filing a Tax Appeal with the IRS

What about filing an appeal? Taxpayers can challenge their tax liability with the IRS’s appeals division under various circumstances. Some of the most common grounds for filing a federal tax appeal include:

  • The IRS improperly calculated your taxable income;
  • The IRS improperly calculated your qualified deductions;
  • The IRS improperly assessed your credits, exclusions or exemptions; or,
  • The IRS failed to consider all relevant facts when calculating your tax liability.

What if You Don’t Qualify to Submit an Offer in Compromise and Don’t Have Grounds for an Appeal?

What if you are behind on your taxes but don’t qualify to submit an offer in compromise and the IRS has calculated your tax liability correctly? Even in this scenario, you still have options available. But, the specific options you have available depends on your individual circumstances, and to make an informed decision, you will need to discuss your circumstances with an experienced tax attorney.

Do You Need Help Dealing with the IRS?

If you need help dealing with the IRS or have questions about your options, we invite you to get in touch. To request a confidential consultation with tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group in New Jersey, please call 201-842-7696, email or contact us online today.

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