An offer in compromise is an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed. An accepted offer in compromise is a contract. The terms of the contract must be followed by the taxpayer. Failure to follow these terms results in the termination of the offer in compromise. Thus, the amount originally owed is restored and the taxpayer is liable for that amount.
IRC § 7122 gives the IRS the authority to enter into such an agreement with taxpayers who are experiencing financial difficulty. The offer in compromise has the following objectives:
To collect what can reasonably be collected at the earliest possible time and at the least cost to the government;
To achieve a resolution that is in the best interest of both. The individual taxpayer and the government;
To provide the taxpayer a fresh start toward future voluntary compliance with his/her tax liability;
The IRS will accept an offer in compromise in three situations:
Doubt as to collectability—If it is unlikely that the IRS can collect the tax liability in full (This situation will be dealt with in detail in Part II of this Part V blog);
Doubt as to liability—If there is a dispute as to the amount the taxpayer owes (Part III of the five part blog);
Effective tax administration—If collection of the full amount of unpaid tax liability would cause the taxpayer economic hardship, or based on other public policy or equity considerations (e.g., taxpayer’s age, unemployed, sickness, etc.) (Part IV of five parts), the IRS will consider a compromise for less than the full amount owed. This is so even is the taxpayer is able to pay the full amount owed.
WHAT QUALIFIES A TAXPAYER FOR AN AUDIT RECONSIDERATION?
A taxpayer who discovers inaccuracies in their audit may ask the IRS for an audit reconsideration if any of the following factors exist:
(1) The taxpayer did not personally appear at the audit.
(2) The taxpayer moved and did not receive correspondence from the IRS related to the audit.
(3) The taxpayer has new documentation to present to the IRS
(4) The taxpayer submitted documentation to the IRS that the IRS did not consider. (NOTE: This is a common occurrence during correspondence audits since the taxpayer is not
actually present to go over documentation in person with the IRS Representative.)
(5) The taxpayer did not file an original return and the IRS prepared the return for the taxpayer by using documents received from third parties. These third party documents might
(6) The taxpayer has not paid the tax owed.
(7) The taxpayer claimed a credit that the IRS denied. This often occurs with the first-time homebuyer's credit.
WHAT DISQUALIFIES A TAXPAYER FROM AN AUDIT RECONSIDERATION?
There are cases when the taxpayer may not qualify to request an audit reconsideration . These include:
(1) If the taxpayer already entered a closing agreement with the IRS after the audit
(2) If the taxpayer has filed for an "offer in compromise." An offer in compromise allows the taxpayer to settle the tax debt for less than the amount owed. If the taxpayer has filed the offer
in compromise, the taxpayer is, in effect, admitting to the full tax liability and promising to pay the lesser amount agreed upon to settle the debt.
(3) If the taxpayer is a member of a partnership in which the partnership has received a final audit report
(4) The court, (including the U.S. Court or another court), has issued a final decision regarding the tax liability.
ALTERNATIVES TO AUDIT RECONSIDERATION
There is recourse for taxpayers that do not qualify for audit reconsideration. Asheville Total Tax Solutions,Inc. will be able to assist the taxpayer with selecting the best alternative for the
taxpayer's particular situation. Alternatives to audit reconsideration include:
(1) If the tax liability is in doubt, the taxpayer may present a simplified "offer in compromise" that does not require a filing fee. This offer in compromise allows the taxpayer to settle
the debt by paying an agreed upon lesser amount than originally owed.
(2) The taxpayer may file an amended Form 1040X . The taxpayer may use Form 1040X to correct an error on the original tax return.
(3) The taxpayer may file Form 843 "Claim for Refund and Request for Abatement." Form 843 is used to claim a refund or to ask for an abatement of certain types of taxes, penalties,
fees and interest.
(4) The taxpayer may file Form 8857 "Innocent Spouse Relief." If a taxpayer becomes aware of a tax obligation for which their spouse, (or former spouse), is solely responsible,
the taxpayer should file Form 8857 to request relief from that tax liability.
Working with the IRS to settle a tax dispute is a complicated process. Be sure to consult a tax professional to assist you. Asheville Total Tax Solutions, Inc. has the expertise to guide you through the tedious process of settling a tax dispute.
Our practice focuses on, in addition to tax preparations, IRS representation of taxpayer before the IRS concerning collection matters. We do tax planning either on event driven bases or comprehensively. More than a few taxpayers who petition the United States Tax Court to settle their dispute with the IRS choose to represent themselves before the court rather than engage an attorney. We assist these taxpayers through income tax research and other guidance.
What is an audit reconsideration ?
Many times after an audit has been completed, the taxpayer discovers that the audit results were inaccurate. These discoveries are common in the case of a so-called correspondence audit. Office and field audits are generally accurate, but, errors are committed in these audits also.
There are three main types of IRS audits: a correspondence audit, an office audit and a field audit. The correspondence audit involves a letter from the IRS requesting additional information about a particular part of the taxpayer's tax return. An Office audit involves meeting with the IRS agent at the IRS office. During a field audit, an IRS agent may visit a home or business to examine financial information.
An audit reconsideration exam gives the taxpayer another chance to arrive at the correct tax liability.
If you have any questions about audit reconsideration or other IRS examination issues in Asheville, North Carolina or the surrounding area please feel free to contact us at (828) 253-7231 or visit us on the web at creasmanfp.com