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What is a reasonable amount for an offer in compromise?

When you owe back taxes and have a slim chance of ever paying off the full bill, an offer in compromise can help. This is one of the few avenues that allow you to pay your tax bill for less than the total amount.

A Tax Court decision offers a glimpse into what might be a reasonable offer. It also illustrated the length of time it can take to resolve a tax dispute.

A tax bill from the mid-90s

The facts were not in controversy and were summarized by Forbes. A tax bill started to add up between 1992 through 1996.

What about the 10 year statute of limitation on collection efforts you ask? By 2005, the taxpayer had made a third offer in compromise.

You need to be aware that an offer in compromise stops the IRS collection process and pauses the 10 years time frame for collecting back taxes. 

The IRS gets serious about collecting

In 2007, the IRS got serious about collecting when the total amount owed climbed past $13 million. It issued a notice of intent to levy (seize) the taxpayer’s property. The taxpayer requested a collection due process hearing and argued that the Service was unreasonable in rejecting his 2005 offer in compromise of $500,000.

A collection specialist investigation had placed a “reasonable collection potential” at $3 million. The taxpayer’s lack of more recent tax compliance was also cited in the rejection notice.

This is where we get into the lengthy part. The taxpayer appealed the initial decision and then lost at the IRS Appeals. A Tax Court appeal was pending for almost seven years. Another appeal up to the Eighth Circuit Court of Appeals was just decided this summer. From 2007 to 2016, the appeals process took almost 10 years.

The taxpayer claimed liquidating his assets had brought in less money than assigned by the IRS. Ultimately, the taxpayer lost and the appellate court stated he could not “show that the Office of Appeals abused its discretion when it rejected his offer.”

After fighting for more than 20 years over back taxes, the taxpayer is no closer to resolving the underlying issue. Of course, he also delayed paying anything or having his property seized.

When it poses a significant economic hardship to pay a tax bill, work with a pragmatic tax attorney to find a timely solution. 

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