Offer in Compromise
In lieu of or in addition to bankruptcy as an option for those with tax debt, an Offer in Compromise (OIC) is a written offer by a taxpayer to the IRS or Colorado Department of Revenue to settle an outstanding tax debt for less than that owed. Note that, unlike with bankruptcy filings in Denver and most areas of Colorado where the result is more predictable based upon an objective set of factors, such as the debtor’s income/expenses, family size, and type and amount of debt, an Offer in Compromise can be accepted or rejected at the discretion of the IRS based upon the Reasonable Collection Potential of the Colorado taxpayer. The Reasonable Collection Potential is determined by the taxpayer’s income versus expenses and assets versus liabilities, particularly with regard to any equity which can be seized from any real estate, vehicles or other financial assets, such as bank or non-retirement brokerage accounts.
The taxpayer may file an Offer in Compromise in Colorado using one of the following three grounds:
- Doubt as to Liability – The taxpayer, regardless of ability to pay the tax debt, asserts that the liability was determined in error,
- Doubt as to Collectability – The taxpayer acknowledges the accuracy of the tax debt but claims an inability financially to pay the tax debt in full before the expiration of the statute of limitations for collection, or
- Effective Tax Administration – A similar ground to Doubt as to Collectability, the taxpayer claims that (even though the tax debt has been accurately calculated and the IRS is likely to satisfy the full liability from the taxpayer’s assets), such collection would result in economic hardship.
An Offer in Compromise typically is not initially accepted by the IRS. Rather, the IRS will (similar to negotiations over the sale price of real estate) often make a counteroffer for a higher amount.
Please be advised that many, if not most, Offers in Compromise are not accepted at all, particularly if the taxpayer owns assets such a home or vehicle with equity that can seized by the tax authorities. However, for taxpayers with little or no valuable assets and a very high amount of tax and other debt, an Offer in Compromise can be a valuable tool for minimizing the tax bite.Offer in Compromise and Bankruptcy
For many in debt, both the filing of an Offer in Compromise and a chapter 7 or chapter 13 bankruptcy filing in Colorado Bankruptcy Court may prove most fruitful. Contrary to popular wisdom, there are circumstances in which tax debt can be discharged (see Practice Area: Bankruptcy and Taxes). A chapter 7 bankruptcy may allow for the debtor to completely discharge all taxes owed (as well as almost all other unsecured debt), whereas a debtor in a chapter 13 bankruptcy may pay back anywhere from 0% to 100% of tax debt (and unsecured debt) depending on a wide array of factors.
For tax debt which cannot be discharged under the Bankruptcy Code, the next best option may be to pay back such debt in a chapter 13 bankruptcy plan without the further accumulation of interest and penalties – which can save thousands of dollars until the bankruptcy discharge (of the tax liability plus unsecured non-tax debt) enters within 3 to 5 years after filing.
For situations where the Priority (e.g. non-dischargeable) tax debt increases the monthly chapter 13 plan payment to the point where the debtor cannot make sustained payments and whereby the Plan is not confirmable based on feasibility grounds, an Offer in Compromise can be filed which reduces the remaining tax debt. Considering the IRS standard of Reasonable Collection Potential when examining the merits of an Offer in Compromise, a Colorado debtor also in bankruptcy likely has a higher likelihood of success in having an Offer in Compromise granted, presumably because the bankruptcy debtor will typically have little or no valuable assets to be seized to satisfy the tax liability.
The Law Office of David M. Serafin will fight for your rights when addressing a tax debt owed to the IRS or Colorado Department of Revenue. An experienced Denver tax and bankruptcy lawyer with a Master’s Degree in Taxation, David M. Serafin will work with the tax authorities to lower the tax, interest and penalties you owe as much as reasonably possible. Additionally, the Law Office of David M. Serafin will act as a tax advocate to navigate you through the myriad IRS and Colorado tax rules and regulations in order to minimize your tax liability.