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Wednesday, October 15, 2014

Boyd Student Ashleigh Wise Writes About Alternative Dispute Resolution Process Used by IRS

By Ashleigh Wise, Student Fellow, Saltman Center for Conflict Resolution

We’ve all seen those commercials claiming to save you thousands of dollars while wiping out your tax debt. But are those commercials truthful and not just a scam to get your money? It depends.

The IRS informally uses many methods of alternative dispute resolution (ADR). But the IRS also has distinct forms of ADR. The offer-in-compromise (OIC) is one of those methods. An OIC is an agreement between the taxpayer and the IRS to settle a tax debt for less than the full amount owed. An OIC is the preferred method for the tax firms claiming to resolve your tax debt.

Any taxpayer can submit an OIC, but few are eligible. If a person can pay their entire liability through a lump sum or installment agreement, then the IRS, protecting the government’s financial resources, will not accept a reduction in a taxpayer’s debts. A taxpayer who has no possible way of paying off their tax debt would be a good candidate for an OIC.

An OIC depends upon a taxpayer’s financial profile supported by third-party financial documents and a mathematical formula for determining the amount that the taxpayer will be required to pay. For an OIC to be accepted, a person must submit a completed Form 656, copies of tax returns for disputed years, and a personal narrative explaining either why a) there is a doubt to collectability, b) doubt to liability, or c) it would be unfair to collect the entire debt amount. The taxpayer then sends the completed packet to the IRS, who either accepts or rejects the offer.

An accepted OIC is a binding contract between the taxpayer and the IRS. The taxpayer must make the payments they offered to make while also filing and timely paying their taxes for the next five years. Taxpayers are barred from contesting the amount of the tax debt in court. Furthermore, the taxpayer is still liable for the deficiency, penalties, and interest until they have paid the entire amount of the agreed amount.

Submitting an OIC is a complicated process with many rules and stipulations attached. Do not get fooled by the easy settle your debt tax commercials. Taxpayers with the financial resources to pay their tax liabilities are not eligible for an OIC. However, for those that qualify, an OIC can be an effective tool for a fresh start and permanent relief from crippling tax debt.