There’s a little‑known program that the IRS administers called the IRS offer in compromise or as they like to call it,”Effective Tax Administration Offer in Compromise.” What is it?
Typically, when we think of an Offer in Compromise, which is a deal to settle for less with the IRS, we think of doubt as to collectibility offers. Doubt as to collectibility offers are those offers where the IRS goes through your financial situation, and they go through a mathematical calculation, and they basically tell you what they’re willing to settle for.
Effective tax administration is a little bit different. Effective tax administration is used when typically a retired person has the paper ability to pay, but is perhaps asset rich, monthly cash poor.
Let me give you an example. You have an elderly person, perhaps living alone, perhaps married still, living on a fixed income, Social Security, and they have equity in their house that surpasses the amount of their liability.
The IRS goes through a formula and determines whether or not it is fair to force that elderly retired couple living on a fixed income to liquidate the asset, their house, and pay their tax bill.
If it’s not fair, basically you get a deal and the IRS will settle somewhere between $250 and up. It really just depends on what they come back with you to.
The concept behind this type of offer is that it would be unfair to force you to liquidate that asset in order to pay your tax bill. Perhaps if you sold your home, you have to live someplace, so you wouldn’t be able to afford the cost of rent or a mortgage for someplace else equally suitable to live.
That’s what an effective tax administration offer is. They’re very, very rare. There are some indications that the IRS is becoming more liberal in this regard, but we’ll just have to wait and see.