Doubt as to Collectibility

Doubt as to Collectibility Relief … When You Cannot Afford to Pay

An Offer in Compromise based on “Doubt as to Collectibility” is only available to a taxpayer when the taxpayer cannot repay the past due taxes IN FULL before the expiration of the collection statute expiration date (aka “CSED”).  26 C.F.R. § 301.7122-1(b)(2).  The IRS analyzes the taxpayer’s ability to pay from the combination of asset sales and future income.  When determining the ability to pay before the CSED, the IRS will combine (a) the total liquidation value of the taxpayer’s assets with (b) the taxpayer’s net income during the remaining period before the expiration of the collection statute expiration date.  When determining ability to pay before the CSED, the IRS will permit a taxpayer to retain sufficient assets to pay basic living expenses; the determination of the amount of such basic living expense will be founded upon an evaluation of the taxpayer’s individual facts and circumstances presented by the taxpayer’s case.  26 C.F.R. § 301.7122-1(c)(2)(i). 

To guide this determination, the IRS takes into account guidelines published by the Secretary of the Treasury on national and local living expense standards.  26 C.F.R. § 301.7122-1(c)(2)(i).  Where a taxpayer is offering to compromise a liability for which the taxpayer’s spouse has no liability, the assets and income of the nonliable spouse will not be considered in determining the amount of an adequate offer.  26 C.F.R. § 301.7122-1(c)(2)(ii).  The assets and income of a nonliable spouse may be considered, however, to the extent property has been transferred by the taxpayer to the nonliable spouse under circumstances that would permit the IRS to affect collection of the taxpayer’s liability from such property (e.g., property that was conveyed in fraud of creditors), property has been transferred by the taxpayer to the nonliable spouse for the purpose of removing the property from consideration by the IRS in evaluating the compromise, or as provided under state community property laws.  Doubt as to collectibility exists in any case where the taxpayer’s assets and net income, as calculated by the IRS, are less than the full amount of the back-tax liability.

Automatic Acceptance

An offer to compromise based on “Doubt as to Collectibility” generally will be considered acceptable by the IRS if it is unlikely that the tax can be collected in full and the offer reasonably reflects the amount the IRS could collect through other means, including administrative and judicial collection remedies.  This collectible amount is the reasonable collection potential (“RCP”) of a case.  In determining the reasonable collection potential of a case, the IRS calculates the taxpayer’s reasonable basic living expenses.  In some cases, the IRS may accept an offer of less than the total reasonable collection potential of a case if there are special circumstances.

The Tax Code provides that the Offer in Compromise offer shall be deemed accepted automatically if the offer is not rejected within 24 months after its submission.  26 U.S.C. § 7122(f).  Any period during which any tax liability (which is the subject of the offer) is in dispute in any judicial proceeding is not taken into account in determining the expiration of the 24-month period.  The offer submission date for purposes of 26 U.S.C. § 7122(f) is the date on which the offer is received by the IRS.  The postmark date is irrelevant in determining when an offer is submitted.  

An offer will not be deemed to be accepted if the offer is, within the 24-month period, rejected by the IRS, returned by the IRS to the taxpayer as unprocessable or no longer processable, withdrawn by the taxpayer, or deemed withdrawn under 26 U.S.C. § 7122(c)(1)(B)(ii) because of the taxpayer’s failure to make the second or later installment due on a Periodic Payment Offer.  The date an offer is rejected for purposes of 26 U.S.C. § 7122(f) is the date on which the IRS issues a written notice of rejection under 26 C.F.R. § 301.7122-1(f)(1).  The period during which the IRS Office of Appeals considers a rejected Offer in Compromise is not included as part of the 24-month period because the offer was rejected by the IRS within the meaning of 26 U.S.C. § 7122(f) prior to consideration of the offer by the Office of Appeals.

Complicated? You bet.

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