Can I make the IRS an offer to pay tax only?
I received this question about using an offer in compromise on interest and penalties:
I owe $25,000 in tax, but the interest and penalties have made the amount I owe almost double. Won’t the IRS be happy just to get the principal I owe back and forgive the interest and penalties?
In an offer in compromise, the IRS considers all of your liabilities – tax, penalty, interest – as being of equal stature. The amount you owe in penalties is equally as important to the IRS in an offer in compromise as the tax. Although it may seem logical to assume that the penalties and interest are “extras” and more easily forgiven, this is simply not true with the IRS.
To the IRS, the tax, penalty and interest all bear equal weight. There is no formula to abate interest and/or penalties in an offer in compromise. It is purely a collection formula. If the IRS believes they can collect it, they will not compromise it. The IRS does not consider “tax only” offers unless for some reason that is the exact amount that can be collected.
If you believe the IRS should not have charged you penalties, then the proper course is to request abatement outside of the compromise process. This involves an administrative decision of the IRS to forgive penalties they have already determined you are responsible for. Penalty abatement involves proving to the IRS factors that there were beyond your control that prevented timely payment or filing. Interest can be abated if the IRS unreasonably fails to perform a ministerial or administrative function. The additional interest can be abated during the period of delay.
A better option on eliminating interest and penalties is often bankruptcy. A Chapter 7 bankruptcy can completely eliminate tax, interest and penalties. A Chapter 13 bankruptcy repayment plan can stop IRS interest accruals and force the IRS to accept a reduced amount of penalties by bankruptcy law, not tax law. An offer in compromise can result in the IRS forgiving tax, penalties and interest, but only if the collection is in doubt.