The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise taxpayers and businesses on how to utilize the Internal Revenue Service’s collection alternatives to manage their federal tax liabilities. The IRS has broad authority and tools available to collect delinquent taxes, including the ability to file a Notice of Federal Tax Lien. Therefore, if taxpayers are contacted by an IRS revenue officer, it is important to understand the various collection alternatives available to resolve federal tax liabilities. Some collection alternatives include: (i) offer-in-compromise, (ii) installment agreements, (iii) currently not collectible status, (iv) discharging taxes in bankruptcy, and (v) challenging the underlying tax liability. Utilizing a collection alternative may help prevent, or significantly reduce the effect of, an IRS collection action.
In our previous article on Offers-in-Compromise, we provided a general overview of this particular collection alternative, including some of the factors that taxpayers should consider when deciding whether they are eligible to make an offer. This article provides a more detailed look at one type of offer-in-compromise, known as a doubt as to liability offer-in-compromise (or “DATL-OIC”). As its name would suggest, this collection alternative involves offering a payment amount to the IRS, in an attempt to resolve a disputed federal tax liability. Taxpayers need to be aware, however, that the process is more intricate and involved than simply negotiating or settling on a reduced amount with the IRS. To better understand doubt as to liability offers-in-compromise, it is helpful to distinguish them from regular offers-in-compromise.
The Difference between ‘Doubt as to Collectability’ and ‘Doubt as to Liability’
An offer-in-compromise is an agreement between a delinquent taxpayer and the IRS to settle a federal tax liability for less than the full amount owed or assessed. An offer-in-compromise provides eligible taxpayers the opportunity to pay off their tax debt and to get a fresh start. It is important that taxpayers are aware of the important distinctions the IRS makes between when a taxpayer is simply unable to pay the liability in full and when the taxpayer wants to dispute the amount that has been assessed, either wholly or partially.
If a taxpayer agrees on the amount of liability assessed by the IRS, but is unable to make a full payment, the taxpayer can make a doubt as to collectability offer, regularly referred to as an offer-in-compromise. To be considered for a doubt as to collectability offer, taxpayers must make their offer based on what the IRS will consider their true ability to pay. Taxpayers can utilize this collection alternative by filing a Form 656, Offer-in-Compromise (OIC).
Taxpayers who have a legitimate doubt that they owe part or all of their tax liabilities can file a Form 656-L, Offer-in-Compromise (Doubt as to Liability). “Doubt” as to liability exists when there is a genuine dispute as to the amount, or even the existence of, a federal tax liability. Generally, taxpayers will utilize a doubt as to liability offer because they were unable to dispute the liability during the time allowed. Taxpayers who do not dispute the amount of tax debt should not file a Form 656-L. When deciding whether to file a form 656-L, Offer-in-
Compromise (Doubt as to Liability), taxpayers should consider the following:
1. A doubt as to liability offer is only accepted for the tax period(s) in question;
2. Submitting an offer application does not guarantee that the IRS will accept the offer – rather, it begins a process of evaluation and verification;
3. The taxpayer’s offer must be more than zero ($0);
4. Taxpayers must include a written statement that explains why the tax debt, or a portion of the tax debt, is incorrect;
5. Taxpayers also must provide documentation or evidence that will help the IRS to identify the reason(s) for doubting the accuracy of the tax liability; and
6. Doubt as to liability does not exist if the tax debt has been established by a final court decision or judgment.
Taxpayers cannot submit a doubt as to liability offer (Form 656-L) and a doubt as to collectability offer (Form 656 or 656-B) at the same time. Essentially, this means that taxpayers cannot simultaneously dispute the assessment of tax liability, while claiming that they are unable to pay it. Taxpayers should resolve any disagreements about the validity of the tax liability before considering filing any offers based on a doubt as to collectability.
Calculating ‘Doubt as to Liability’ Offers
As we discussed in our prior article on offers-in-compromise, doubt as to liability requires an intimate understanding of the policies and procedures behind the IRS offer-in-compromise program. Taxpayers cannot simply offer an amount and hope that the IRS will accept that number, regardless of the taxpayer’s good faith belief in that number’s accuracy or validity. A doubt as to liability offer-in-compromise is quite different from a contract dispute that leads to a settlement or negotiation between two private parties. Rather, it requires a thorough understanding of the calculation used by the IRS to determine the amount owed. A taxpayer who simply offers some amount to the IRS, without any evidence or detail, is going to be rejected. This is a waste of both time and money for the taxpayer. Therefore, due to the many nuances and planning techniques involved with calculating a doubt as to liability offer, it is important to work with someone that routinely handles these offers-in-compromise.
A doubt as to liability offer-in-compromise can provide individual taxpayers and businesses an excellent opportunity to resolve their federal tax liabilities, especially if they dispute the amount assessed by the IRS. Taxpayers who have been contacted by an IRS revenue officer should consult with an experienced tax attorney to find out if they qualify for an offer-in-compromise or other collection alternatives.
Contact Nardone Law Group
Nardone Law Group represents individuals and businesses in federal tax matters, including collection alternatives, such as offers-in-compromise. If you or your business have been contacted by an IRS revenue officer, or are struggling with tax liabilities, you should contact one of our tax attorneys today. Nardone Law Group’s tax attorneys have vast experience representing clients before the IRS. We will thoroughly review your case to determine what options and alternatives are available to you.