IRS Expands Debtors’ Ability to Compromise

People facing a huge overdue tax bill who would suffer severe economic hardship if forced to pay it all will have greater opportunity to compromise with the Internal Revenue Service under regulations released Monday.

“This new type of offer gives the IRS a safety valve to handle tax cases in difficult situations,” said IRS Commissioner Charles Rossotti. “We now have more flexibility to settle debts with taxpayers in ways we couldn’t before.”

The new rules grew out of a mandate by Congress to expand the “offer in compromise” program, which permits the IRS to accept a lower payment only when full collection is doubtful or when there are questions about whether the tax is actually owed.

Under this system in 1998, the IRS accepted 25,052 of 105,255 offers, collecting $290 million of $1.9 billion in total outstanding taxes that year.

Beginning Wednesday, the IRS will work under rules that let agents consider economic hardship and other exceptional personal circumstances in deciding whether to accept a taxpayer’s offer.

Economic hardship could be a long-term illness or disability that threatens to exhaust a person’s resources or future earning ability. It also could involve situations in which sale or liquidation of a person’s assets, such as a retirement fund, would use up money needed for basic living expenses.

“These appear to be much more generous standards for the taxpayer,” said Tom Ochsenslager, tax partner at the Grant Thornton accounting firm.

People who qualify must have a history of paying and filing their taxes, and the new rules are aimed only at those in the most severe circumstances, Rossotti said.

“It shouldn’t be misinterpreted by people as an open invitation to avoid paying taxes,” he said.

The offers cannot be approved if the IRS decides they would undermine overall compliance with tax laws.