We previously addressed Offers in Compromise (OIC) based upon “doubt as to liability” and “doubt as to collectability”. However, there is a third option for an Offer in Compromise based upon Effective Tax Administration (ETA).
What qualifies me for an ETA Offer in Compromise?
OIC for Effective Tax Administration is a bit different as it is not based upon your reasonable collection potential (your ability to pay) or doubt as to liability (whether you owe the tax liability the IRS claims). An ETA Offer in Compromise is based upon hardship, public policy and equity. In other words, will the collection of the full tax liability create economic hardship on the taxpayer? This type of OIC assesses if the pursuing of the tax liability is the most effective use of the IRS’ time.
What is an ETA Offer in Compromise?
As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added IRC 7122(c) which allows the IRS to consider whether the collection or enforcement of the tax is an effective way to administer the rules and laws guiding the IRS. In layman’s terms this means that the IRS has to consider unusual or special circumstances affecting the taxpayer’s ability to pay. Essentially, the IRS must review and consider circumstances that would cause a taxpayer to be unable to pay reasonable basic living expenses. This determination of reasonable basic living expenses will vary depending on the individual circumstances of the taxpayer such as location, number of people in the household, etc.
Reasons For an ETA Offer in Compromise
One of the most common reasons for an ETA Offer in Compromise is hardship caused by health concerns. There are other situations that might qualify for an ETA Offer in Compromise, such as misinformation by the IRS or acts of third parties, but those will be addressed in the future as we have focused here on healthcare or illness-related ETA Offers in Compromise. Typically, these types of offers are based upon unusual situations where the collection will create a hardship on the taxpayer (i.e. prevent the taxpayer from meeting his basic living expenses). There are several classic examples of an ETA Offer in Compromise. The most common examples are:
Long-term illness or disability that has affected the taxpayers’ ability to earn a living and where it is likely that the taxpayer’s financial resources will be exhausted by costs of care and support during the illness.
A more specific example would be someone who has been diagnosed with cancer and paying the tax amount claimed would make paying for necessary treatment difficult or impossible. Other types of situations would be liver and kidney issues or diabetes complications that affect the ability to work now or in the prospective future. With an ETA Offer in Compromise the concept is that even assets with significant equity may need to be preserved for the future care and support of the taxpayer (or their immediate family). Another significant factor can be the taxpayer’s age, which can have an impact on the taxpayer’s ability to earn future income. One of the key factors in getting an ETA Offer in Compromise accepted is to document the health crisis. Correspondence from physicians regard the diagnosis and treatment, the patient’s recent history, and the prospective future treatment and effects of the illness can be the key between an accepted offer and a rejected offer. If a physician is willing to comment on the illnesses potential effects on the patient’s future ability to work or earn income, that also can make or break and offer.
The taxpayer is on a fixed income and that income is exhausted each month in providing for the care of dependents.
If you take care of loved ones or dependents, you may be eligible for the ETA OIC.
A taxpayer has assets that contain significant equity.
However, the taxpayer is unable to borrow against those assets, and liquidation to pay the outstanding tax liability would render the taxpayer unable to meet basic living expenses.
How do I apply for an ETA Offer in Compromise?
In order to qualify for an ETA Offer in Compromise, the taxpayer must not have a history of noncompliance with the filing and payment requirements of the IRC; must not have taken deliberate actions to avoid the payment of taxes; and must not have encouraged others to refuse to comply with the tax laws. As with other types of Offers in Compromise, you must be up-to-date with your tax filings, i.e. all required returns must be filed. If you have an unfiled return(s), the IRS will not consider an Offer in Compromise until that return(s) is filed. In addition, any return or forms required to be filed during the course of the Offer in Compromise payments, must be made timely or the Offer in Compromise will be rejected. This includes trust fund taxes for businesses and employers.
The process of preparing an ETA Offer in Compromise can be tricky for those not familiar with the rules, regulations and customs of the IRS. An experienced attorney with our firm can help you navigate your way through this process to maximize the success of your Offer. The IRS may not like to accept ETA Offers in Compromise but with enough documentation and the right approach it can be done. For more information on this topic, please contact one of the attorneys with our firm.