Under the federal tax code, the IRS has the ability to compromise tax, interest, and penalties on certain grounds. For the IRS to consider such a compromise, the taxpayer must submit Form 656, “Offer in Compromise,” with the attachments requested in the instructions to the form. There are three grounds on which the IRS may grant the offer-in-compromise request: (1) doubt as to liability, (2) doubt as to collectibility, and (3) to promote effective tax administration.

The federal regulations provide that, where there is a genuine dispute as to the existence or amount of the correct tax liability under law, a compromise may be granted for “doubt as to liability.” The same regulations provide that “doubt as to collectibility” exists where the one’s assets and income are less than the full amount of the tax liability.

Where those two options are unavailable, the IRS may still grant a compromise to promote effective tax administration. That goal may be met so long as the compromise wouldn’t undermine tax compliance and would avoid creating “economic hardship” or would further compelling public policy or equitable considerations. Economic hardship occurs when a taxpayer is unable to pay reasonable (meaning not affluent or luxurious) basic living expenses. In this analysis, the IRS will consider all the facts and circumstances, including one’s history of tax compliance.

The Wilson Tax Law Group can help if you are considering an offer in compromise. Call us at (714) 463-4430 to discuss your tax issues with an Orange County tax attorney.