The Internal Revenue Service (IRS) and the Minnesota Department of Revenue (MDR) have the authority to settle tax liabilities by accepting less than full payment.
The IRS can compromise for a variety of reasons.
1. A Doubt as to Collectability (DATC) offer (IRM Section 5.8.1) is based on what the IRS believes it can collect from you during the time remaining on the statute of limitations to collect the taxes. To qualify for this type of offer, the IRS must be convinced that you cannot pay the obligation in full within the period remaining on the statute of limitations for collections.
2. A Doubt as to Liability (DATL) offer (IRM section 184.108.40.206) is appropriate if there is a legitimate doubt as to whether you owe part or all of the assessed tax liability. These offers are handled more like an audit reconsideration and will involve a review by the exam division. These offers usually involve a mistake by the IRS in including an item in income, disallowing a deduction, or miscalculating the liability. This is not a second “bite at the apple.” If the IRS has already addressed the issue in appeals, and you still object to the liability, you will most likely have to pursue the matter in court, for example, by paying the tax and suing for a refund.
3. When you do not qualify for a DATC or DATL offer, you should determine whether you qualify for an Effective Tax Administration (ETA) (IRM section 220.127.116.11) offer. Under this type of offer, you owe the taxes and have sufficient assets to pay the full amount of the tax obligation, but due to exceptional circumstances, full payment would cause economic hardship would be unfair and inequitable.
If the IRS accepts your offer for consideration, but rejects it, you have the right to appeal and continue negotiations on that offer. The original representative investigating the offer may have made a mistake valuing your assets, determining the amount of your expenses, or calculating the values of the available assets or income. The Appeals Officer can correct these errors.
If you submitted this offer through a Collection Due Process Hearing, and you do not agree with the determination by the Appeals Officer, you may be able to file a petition in the United States Tax Court, argue that the Appeals Officer abused his or her discretion, and ask that the Offer be remanded to the Appeals Officer for further consideration, restricting the Appeals Officer from again abusing his or her discretion.
The Minnesota Department of Revenue also has a program for accepting an amount less than the full balance as payment in full. The starting point for a compromise with the MDR is similar to the IRS; determine what the taxpayer can afford to pay by determining the net quick sale value of your assets and your excess monthly income, after allowing amounts to pay your reasonable and necessary living expenses. The MDR will evaluate this information in light of the additional facts listed below. Some of these factors are also used by the IRS, but the MDR is often more subjective in its evaluation, like considering your past bad conduct and evaluating your ability to make payments over a longer period.
1. Age of the liability and whether the statute of limitations on collections will soon expire.
2. Employment potential of the taxpayer.
3. Age and health of the taxpayer.
4. Realistic potential for collecting the liability in full.
5. Other liable parties (spouse, partner, corporate officers);
6. Credit bureau report.
7. The makeup of the balance due (how much of the total his tax, penalty, and interest).
8. Whether the liability is comprised of “trust taxes” (such as Minnesota income tax withheld by an employer or sales taxes collected by a retailer).
9. Whether the taxpayer is current with filing all tax returns.
10. Previous collection action taken, past or current bankruptcy of the taxpayer, in the amount paid against the liability to date including any refunds that may have been applied.
11. Whether any doubt exists as to the correctness of the liability.
12. Whether all or a portion of the liability would be discharged if the taxpayer declared bankruptcy.
13. In the case of a business liability, whether the business is open or closed.
14. Whether the offer is the first offer to compromise or is a reconsideration of a previous offer; and,
15. Whether there are factors that would justify an abatement of the penalty.
If the offer is accepted, the MDR will send you an Agreement to Compromise setting out the terms and conditions of the compromise. If the MDR instead send you a letter denying the offer, you may request a reconsideration of the denial by the Minnesota Department of Revenue Taxpayer Rights Advocates office. However, if the compromise Application is not accepted by the MDR or the Attorney General, there are no formal appeal rights.
Offers are often accepted by the IRS and the MDR, so it is worth considering and, in the correct circumstances, pursuing.