Reduce Your Income Tax - Offer in Compromise
	General Rule. Unpaid income tax bills can be reduced or eliminated with either an Offer in Compromise based on ability to pay or in some bankruptcy filings. There are certain requirements and restrictions. Beware of scammers, as shown by a recent IRS announcement.

Many homeowners who are behind on their mortgage or other bills, are also behind the payment of their income taxes. Particularly those who have small businesses.

Some words of advice:

1. File your income tax returns, even if you cannot pay. Your penalties will be much less and the statute of limitations begins to run on collections and the availability of eliminating the taxes in bankruptcy or an Offer in Compromise.

2. After you file your return(s), if you cannot pay, you may pay by credit card, through an installment agreement with the IRS, by getting approval for an offer in compromise, or by deferring collection by attaining hardship status.

Offer in Compromise to Reduce Your Tax Bill

An Offer in Compromise is an agreement between you and the IRS (and the state of Colorado) that resolves your tax debt based on your ability to pay. Both you and the IRS benefit by getting you back into the system and back on track. See IRS Policy Statement P-5-100.

An advantage of the Offer in Compromise is that you do not have the time restrictions which you have to eliminate your tax bills in bankruptcy.

Your tax debt can be legally reduced if:

1. Doubt exists as to whether you can pay the full amount;

2. Doubt exists as to whether you owe the tax; or

3. An exceptional circumstance (economic hardship or unfair or inequitable) exists that allows the IRS to accept a reduced amount.

Generally the IRS will accept an amount that is based on the taxpayer’s ability to pay. This includes:

1. Quick sale (such as garage sale) value of present assets; and

2. Future income expectation

Theoretically (and sometimes actually), a $1 million tax debt could be paid for $1,000. However, as stated below, beware of scam advertisers who state that they can settle for pennies on the dollar.

Generally 20% of the amount offered must accompany a “cash”offer. Full payment of a “cash” offer is due within 15 days after notice of acceptance of the offer. This is based on your ability to pay.

Other IRS programs, such as Innocent Spouse, apply to limit or totally eliminate a tax debt. Under the Innocent Spouse relief provisions, you may not have to pay income tax that is attributable to your spouse (or former spouse) which you did not have reason to know about, even if you signed a joint income tax return. But the Innocent Spouse must apply for such relief within 2 years after the IRS has begun collection efforts for the unpaid tax in question.

State tax authorities, such as the Colorado Department of Revenue, generally follows what the IRS has done. In other words, the state will also compromise your tax debt. But, first it requires that the IRS has accepted your Offer in Compromise. And a separate application, which includes a copy of the IRS Offer in Compromise package must be submitted to the Colorado Department of Revenue.

Beware of Tax Debt Settlement Companies - an IRS Warning

Some businesses have been advertising on TV, the radio, and elsewhere that they are very successful in settling tax debts for “pennies on the dollar.” Although this may be true in some cases, in many cases it is not the taxpayer ends up getting ripped off for fees where the taxpayer gets little or no benefit.

The IRS has issued a consumer alert warning which is posted on its website under “newsroom.”

As the IRS Notice states, “this bad advice costs taxpayers money and time.” And it states that the IRS is increasingly concerned “about unscrupulous promoters charging excessive fees to settle for “pennies on the dollar” when taxpayers who have no chance of meeting the program’s requirements.”

Effect of Bankruptcy on Your Tax Bills

Bankruptcy can help reduce or eliminate your tax bills. However, there are restrictions in a Chapter 7 discharge, such the following general rules:

1. Your tax debt relates to unpaid taxes that are more than 3 years past due;

2. You actually filed the tax return(s) that relate to unpaid taxes at least 2 years before filing bankruptcy; and

3. The income tax bill was assessed at least 240 days before you file or has not yet been assessed. You will probably have to obtain a copy of your tax transcript to check on this issue.

Unpaid payroll taxes, such as income tax and FICA which was withheld by you from an employee’s wages often cannot be discharged. But, sometimes they can be.

If you cannot meet the time requirements so that you can eliminate your taxes in bankruptcy, you may be able to do an Offer in Compromise.

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