What is an Offer-in-Compromise Doubt as to Liability?
Did you know that you can settle your IRS debt if you disagree with the amount due? Most settlements are done because the taxpayer cannot pay but the IRS will settle if you genuinely dispute what you owe. This type of offer is called doubt as to liability (hereafter DATL offer). If you do not dispute your IRS tax liability, you can read more about an offer-in-compromise doubt as to collectability here.
How much doubt do you need?
You must have a genuine dispute regarding the correct amount due, not merely you disagree with the IRS. To have any chance of getting a DATL offer accepted, you will need to have proof that the IRS’ calculation of liability is incorrect. Evidence such as records and other documents, and affidavits can be used to refute the IRS assessment and show the correct balance due. DATL offers tend to be paperwork intensive and rightly so. The IRS is presumed to be correct when it makes an assessment.
A caveat though. If you disputed the IRS assessment in court and lost then you do not qualify to file a DATL offer. You do have other avenues, such as an offer as to doubt as to collectability or bankruptcy but you cannot file a DATL offer.
Where do these disputes arise regarding IRS’ calculation of liability?
The issue of whether the IRS made a correct assessment generally arises after an audit or examination of a tax return. It can also come up after the IRS assesses a business owner personally for unpaid payroll taxes (called trust fund taxes). Many times, the taxpayer when faced with an IRS investigation of liability drops the ball. I don’t say that to be mean, it is the unfortunate truth.
Many times the taxpayer is: (1) missing records, (2) unaware of the proper substantiation requirements, or (3) just plain fails to respond to the IRS. The IRS is not required to do the taxpayer’s job and it will assess what it thinks is the correct tax. I am not sure of the statistics but this happens more often than I’d like to think. Now the taxpayer is faced with paying a tax he or she may not actually owe.
How do I dispute the amount due?
You will file Form 656-L with the IRS (make sure not to file Form 656, which is a different type of offer form). Attached to the form, you will provide a written statement explaining why the IRS’ assessment is wrong. Additionally, you will provide any supporting evidence to identify the points of disagreement with the IRS and which support what you believe is the correct liability.
Failure to properly prepare the Form 656-L and attachments will result in your offer being returned. You will then have to resubmit the form and pay another application fee. Obviously, you want to avoid that so make sure to read the instructions and double-check your evidence first before sending to the IRS.
How much do I offer?
The amount of the offer-in-compromise needs to equal what you believe is the correct liability; if you believe no assessment should have been made then you need to offer at least $1. The reason for the dollar, even if you owe nothing, is that the DATL offer is a contract and so there needs to be some consideration for the settlement. This means you need to offer something to make it legally binding.
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your IRS tax problems, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.
James D. Wade, Esq.
Law Office of James D. Wade
57 Portland Road, Unit 3
Kennebunk, ME 04043