There are several ways in which an individual gets into trouble with the Internal Revenue Service or the State of California Franchise Tax Board.
They can have a spouse who has a drinking or gambling problem and rather than pay their taxes, are using the money for play. Last week I wrote about business owners who use the collected sales taxes or payroll taxes as an interest free loan. This is another way in which to get into trouble.
Depending on the circumstances there are three main ways to be relieved of an outstanding tax liability. Firstly, there is an application for relief as an “innocent spouse.” This is the situation where one party has actively hid a tax obligation from the other spouse. In order to gain this relief one must in essence hang the other spouse out to dry. This is not a popular choice for most married couples.
Secondly, there is the payment plan. The IRS has become remarkably pleasant to work with in the payment plan arena. By approaching them first, before they have placed liens on your home, bank account and any other assets, you stand a much better chance of being able to work out a payment plan that you can abide by.
Thirdly is the Offer in Compromise process. Here, the IRS is willing to take less than full value of the funds that they are owed. This is a lengthy process, but it can be quite beneficial to you as a taxpayer, if you owe a large sum of money and have no real ability to pay it.
Under the Offer in Compromise process there are three grounds to qualify for a reduction of the liability: 1) Doubt as to the liability — basically the innocent spouse or partner theory, or that the IRS has in some way overcharged you. To submit, you must have a really good explanation of why you should be relieved of your liability. 2) Effective Tax Administration — the taxpayer acknowledges the tax is owed and that they have the assets to pay the amount, but doing so would be unfair or inequitable in some way, or would cause an economic hardship. This commonly is the situation where two business partners, one rich, one poor, have created a tax liability and the IRS is going after the rich one for all the back taxes owed. The other common situation is where medical necessity requires funds for the treatment of the taxpayer. If the taxpayer incurred the liability and then was diagnosed with cancer, and the choice is to pay the taxes or get cancer treatment. Clearly the medical treatment should come first. 3) Doubt as to collectibility — this is the most common situation. You owe a relatively huge amount of money and have no real prospects for being able to repay it. This is frequently the case with business owners who have used their employees’ payroll taxes as an interest free loan and the business has gone bankrupt or failed in some other manner. It also is very common for people who file themselves as “EXEMPT” with their employers because they need the cash today and assume that they will pay it back later.
The process is relatively straightforward. The delinquent taxpayer files the Offer in Compromise form, along with a stack of attachments, financial statements, letters of explanation, notes from your doctor and then waits. The IRS requires that a holding period of six months be imposed before they will take any action beyond a simple review of the paperwork for completeness.
The Offer in Compromise forms are comprised of a simple one page application, a basic financial statement of what the applicant makes, spends, owns and has available to them for the foreseeable future. The government has standards for the living expenses of individuals and families based on where you live and they apply these, unless you convince them that some other standard should be applied.
Once the forms are complete there is a formula by which the actual compromise of the claim is determined. Depending on the amount owed and the collectibility, an election is made to either pay a calculated reduced amount in a lump sum cash payment, or over a deferred period of 24 months, or pay the entire amount of the offer over the remaining life of the collection statute.
There is more to the actual process. Frequently a period of negotiation between the representative of the taxpayer and the IRS occurs and there is always updated financial information required.
The forms are available at the IRS Web site, www.irs.gov, or your attorney may prepare them for you and handle the negotiations with the IRS. (David Pisarra is a partner in the Santa Monica law firm of Pisarra & Grist. He (310) 664-9969 or by e-mail at)
Originally published in the Santa Monica Daily Press print edition on June 17, 2003. Read the original PDF.