As people facing IRS collections understand all too well, the power to tax involves the power to destroy. A cycle of bank levies, wage garnishment, offset tax refunds, and recorded tax liens can demoralize tax debtors. Worse yet for the government, that cycle of IRS collections can incentivize tax debtors to not comply with future tax filing and payment requirements. After all, when one owes a debt that cannot be repaid and needs every dollar to survive, why keep giving money to the creditor? In recognition of this reality and to minimize government costs, the IRS engages in offers in compromise to settle federal tax debt.
The Policy Behind The Offer In Compromise
The IRS wants to encourage taxpayers to comply with tax filing and payment requirements. After all, when taxpayers are willing to file tax returns and pay tax obligations voluntarily, the government doesn’t have to invest as much in collection and administration. Conversely, when taxpayers owe the IRS more than they can pay, they may have an incentive to not comply with tax laws and evade IRS collections. To avoid this scenario, the offer in compromise is designed to settle tax obligations, especially ones that are greater than what the taxpayer can pay and which the IRS can even collect. In settling these types of tax debt for less than the amount owed, the taxpayer will have an incentive to comply with future tax requirements and disincentivize tax evasion.
As mentioned above, collecting debt costs money. The IRS recognizes this and understands the pragmatism in settling a debt for as much as can be reasonably collected from the debtor. For instance, if collections would at best result in a $10,000 payment on a $20,000 debt, it makes sense to settle the $20,000 debt for $10,000 as that will result in repayment of what can be expected via collections at less cost. Accordingly, the IRS is inclined to settle tax debt via offers in compromise when the offered amount aligns with the taxpayer’s reasonable collection potential (ie. how much the IRS can expect to collect from the taxpayer’s income and assets).
-By Jin Kim
Jin Kim is a tax attorney in Sacramento, California representing businesses and individuals in tax resolution with the IRS, CDTFA, and FTB.