Alternative Strategy for Enrolled Agents to Deploy in Compromising Tax Debts

July 26, 2011 by  Filed under: Taxes 

Cases of enrolled agents representing financially distressed taxpayers are increasingly common as the economic difficulties of recent years persist for many people. Requesting an Offer-in-Compromise with the IRS is a well-known path for individuals who are unable to pay a federal tax liability in full. However, some of the techniques available for making an acceptable offer are less understood.

Tax professionals preparing for enrolled agent exams are taught to consider an Offer-in-Compromise as a strategy for taxpayers with insufficient income and assets to pay a full tax liability. However, other potential reasons exist for IRS acceptance of an Offer-in-Compromise.

An alternative to Offer-in-Compromise situations involving “doubt as to collectibility” is the possible avenue of promoting “effective tax administration.” Although the IRS grants this last resort consideration, a compromise of tax liability based upon effective tax administration is justifiable. When seeking this, an enrolled agent must prove that a financial hardship exists, public policy dictates compromising the tax debt, and sufficient equitable considerations exist.

A financial hardship is proven when a taxpayer is unable to pay the tax liability plus reasonable basic living expenses. The IRS usually determines financial hardship based upon prescribed expense standards. However, some deviation is permitted. This allows someone who has passed the enrolled agent test to offer the IRS an analysis that takes into consideration the taxpayer’s age, employment status, dependents, and other extraordinary circumstances.

The other considerations involving an Offer-in-Compromise plea of effective tax administration are based upon demonstrating that forcing full payment of the tax debt would undermine the public’s confidence in the tax system. An example is a case of a taxpayer who experiences a long period of hospitalization that causes late payment of taxes and the imposition of penalties. Another possible scenario is when a taxpayer receives inaccurate advice from the IRS.

Offer-in-Compromise appeals involving effective tax administration are considered by a special IRS group after determination that other reasons for the compromise don’t apply. A tax practitioner who has completed the enrolled agent course for representing taxpayers may present an Offer-in-Compromise with multiple justifications. The IRS will first investigate an offer from the standpoint of doubt as to collectibility.

A common objective for enrolled agents in advocating approval of tax debt compromises is to prove special circumstances. An appeal to effective tax administration often provides the grounds for IRS offer specialists to justify acceptance of an Offer-in-Compromise.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Fast Forward Academy is a leading publisher of education for enrolled agents and tax professionals. Access to free questions for the enrolled agent exams is available on their website.

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