Internal Revenue Code authorizes the IRS, to
accept less than full amount of tax liability owed in any civil or criminal
case arising under the tax laws prior to the case's referral to the
Department of Justice. For an Offer in Compromise to be accepted, the
taxpayer must establish to the satisfaction of the IRS that the taxpayer
either: has no means of paying the tax, or does not actually owe the tax.
Prior to 1992 the IRS has been reluctant to
settle tax liabilities. In February of 1992, the IRS announced new
procedures for settling back taxes. The new procedures greatly liberalized
the Offer in Compromise process and increased the likelihood that financially
distressed taxpayers would be able to settle their liabilities for less
than the full amount.
The IRS will accept an Offer in Compromise when
it is unlikely that the tax liability can be collected in full and the
amount of the Offer in Compromise reasonably reflects collection potential.
An Offer in Compromise is a legitimate alternative to declaring a case as
currently not collectible, or to a protracted installment agreement. The
goal is to achieve collection of what is potentially collectible at the
earliest possible time and at the least cost to the government.
The IRS has the authority to settle or
compromise federal tax liabilities by accepting less than full amount under
certain circumstances. One of the following factors must be established in
order for the IRS to accept an Offer in Compromise and settle the
The taxpayer cannot pay off the liability;
There is doubt that the taxpayer actually owes
The settlement would promote effective tax