NEW YORK (CNNfn) - Compromise isn't a word one generally associates with the Internal Revenue Service - but under certain circumstances you can pay less than you owe in taxes.
Under the IRS' "offer in compromise," you can actually pay a smaller part of your debt to the IRS but it's neither easy nor assured that you'll reach such an agreement.
Offers in compromise have become much more commonly sought since, despite tax reform, the number of audits have actually doubled since 10 years ago, to more than 2.5 million audits annually.
However, the IRS has also been much more receptive to compromise, according to Sean Melvin, a tax attorney and author of "Settle Your Tax Debt."
"They actually are not reluctant but if you don't follow the rules exactly, you'll be rejected administratively," said Melvin.
Basically, you have to be in with the IRS pretty deep before you're eligible to use an offer in compromise (OIC).
The IRS considers it a last resort, according to Robert Eckhardt, a certified public accountant. Eckhardt said most taxpayers attempt to first make their taxes on the installment plan.
"When they have difficulty paying those installments, then they look for the offer in compromise," said Eckhardt.
Under the OIC, the IRS will settle your tax bill for less than the amount owed when the agency doesn't think it can collect your liability by any other means, such as liquidating your assets.
Typically, said Melvin, people begin to look at an OIC for one of two reasons. First, they have ignored warnings about their tax liability for too long, accumulating penalties and interest far exceeding their capacity to pay in one lump sum.
Second, they may have had a large taxable transaction, such as the sale of a rental property, that was either improperly reported or not reported to the IRS at all.
However, sometimes the difference is not as clear cut. Sometimes, the two sides disagree about a particular item which affects the tax liability, such as a disputed assessment.
In such a case, the IRS says you must provide written statement of supporting evidence.
Once you've decided to apply for the OIC, you'll need to begin by filling out IRS form 656, which can be downloaded here.
Essentially, you'll be making a compromise offer to the government, saying that although you can't pay the total amount, you can pay what you consider to be a reasonable lesser amount.
The IRS won't take your word for it. They'll require documentation, using form 433A for individuals filing for OIC and form 433B for businesses filing for OIC.
The IRS expects a pretty stiff offer from you. According to the agency, the amount of your offer should equal or exceed the following:
- The amount you can collect from selling your assets.
- The amount you can collect from your present and future income.
- The amount that can be collected from a third party (family, people who owe you money..etc)
- Money that you receive that's not usually subject to taxation, such as workers compensation and veteran's benefits.
Your ability to earn a living is important in the IRS' assessment. "If you owe a lot of taxes, don't have much assets but just graduated from law school, the IRS will say 'We'll wait a while to see if you get a decent job,'" said Eckhardt.
Under that circumstance, they would probably pursue an installment plan agreement in the meantime.
The OIC is not a delay tactic, and if the IRS thinks you're applying just to put off payment, it says it will continue their normal collection procedures.
Your offer will be turned over to an IRS examiner, who will check out your documentation and make sure you've only claimed the necessary expenses allowable for your general household needs.
If your offer is approved, you'll be notified by the IRS and will have reached the promised land. When the offer is accepted, your liability for any additional taxes is wiped away.
But before you get comfortable, Melvin warns you not to flirt with any kind of tax trouble again.
"Undoubtedly, the IRS will inspect your future returns to see if you're not taking advantage of the offer of compromise," he said.
"The focus is on you and since it is, you might as well make sure all your t's are crossed and your i's are dotted."
-- by staff writer Randall J. Schultz