If there is a legitimate doubt that you really owe the tax, the IRS may allow you to settle for less than owed. This option is called an offer in compromise based on doubt as to liability. The rules are very different than a standard offer in compromise, and this program is not the right option for all tax liabilities that are in dispute.
To learn if an offer based on doubt as to liability is an option in your situation, contact us at Wiggam Law today. We’ll analyze your case and help you get the best resolution for your unique situation. Here is an overview of OIC doubt as to liability in the meantime.
Key takeaways
- Offer in compromise – Setting taxes for less than owed.
- Doubt as to liability – A legitimate doubt that you really owe the tax liability.
- Application – Apply using Form 656-L. Make an offer based on how much you really owe.
What Is an Offer in Compromise Based on Doubt as to Liability?
This is when the IRS lets you settle for less than owed because there is a genuine doubt that you legally owe the full tax liability. The settlement amount should reflect the amount that you legitimately owe.
You do not qualify if a final court decision has already finalized the tax debt. You also should not apply to dispute the liability if you are currently working with the IRS. For instance, if you have already requested an audit reconsideration, you should not apply while waiting for the IRS’ decision.
How to Qualify for a Doubt of Liability Offer
Again, you may only qualify if there is a legitimate doubt you owe the tax debt. If any of the following apply, you cannot use this program:
- You’re in an open bankruptcy – however, you can apply when the bankruptcy case is over if you meet the rest of the requirements.
- You’re paying restitution – You can apply on other tax liabilities, just not on the restitution.
- You’re litigating with the Department of Justice.
- You’ve already accepted an offer in compromise based on doubt as to collectibility for the same tax period.
- You’ve made an election under IRC § 965(i) related to foreign income.
- You have not submitted an audit reconsideration.
The IRS has a pre-qualifier tool, but it doesn’t work if you’re applying based on doubt as to liability. It’s only for doubt as to collectibility, which is when you apply for a settlement because you cannot afford to pay the bill.
Reasons Taxpayers Request Doubt of Liability Offers
Generally, taxpayers request doubt of liability offers when they experience the following issues during an IRS audit:
- The examiner interpreted the tax code incorrectly.
- The examiner didn’t consider all of the evidence.
- There is new evidence that may lead to a change of assessment.
Taxpayers also pursue this option in situations where the IRS requires them to pay the full amount of tax before considering a claim for a refund. For example, imagine a taxpayer with a liability related to an overstated value of stocks. When they realize that their broker or employer fraudulently overvalued the stocks, they file an amended return but receive an adverse determination. So, they request an offer based on doubt of liability.
What If I just can’t afford to pay the tax?
If you agree with the tax due but cannot afford to pay it, you may want to apply for an offer in compromise based on doubt of collectibility. This helps you access a settlement based on your ability to pay. If you cannot afford anything, look into currently not collectible status. If you can only afford minimal monthly payments, a partial payment installment agreement (PPIA) may be an option for you.
What if the IRS filed a tax return for me, and I disagree with the tax liability?
In this situation, you should file your original tax return, which should show your updated tax liability.
What if you disagree with the audit results?
Request an audit reconsideration. If the IRS denies the reconsideration, you may be able to apply for an offer based on doubt as to liability after that point.
What if you disagree with the penalties you owe?
Then, request penalty abatement. Doubt of liability offers aren’t designed to remove penalties from your account.
What if my spouse or former spouse really owes the tax?
Then, look into the Innocent Spouse Relief Program. Depending on the specifics, you can separate your tax liability and only be liable for your own portion of the bill.
What if you believe you don’t owe the tax and have exhausted other options?
As long as there hasn’t been a decision issued in court about the liability, you can apply for an offer in compromise based on doubt as to liability.
How to Apply for a Doubt of Liability OIC
To apply, first, make sure that this is the right program for your needs. If not, the IRS will return your application, but in the meantime, you may have missed deadlines or opportunities to resolve your tax concerns through the correct processes. Because this is such a complicated and particular aspect of the tax code, you should seek representation.
If this is the right program, file Form 656-L – the L stands for liability. Do not use Form 656 without an L – that is the standard offer in compromise form.
You need the following info.
- Name, tax ID number, address, and contact info.
- Business name and EIN if applying for business taxes.
- Type of tax and the tax period – for instance, income tax, payroll tax, etc.
- Amount of the offer – must be at least $1 and should reflect the correct tax liability.
- The reason why you disagree with the tax liability.
The most important part of the application is part five, where you explain why you don’t owe the tax liability. Reference the tax code to support your arguments, and attach documents supporting your claims. Finally, sign the form – make sure both you and your spouse sign if you filed jointly. If the application was prepared by someone else, they will also sign and note their credentials.
You do not need to include a downpayment. If you include a payment, be aware that the IRS will keep it even if your offer is not accepted. The agency can apply the payment as best suits the needs of the government – generally, the IRS applies payments to the oldest tax liabilities first.
Important Considerations
When you apply for an offer based on doubt as to liability, you agree to the following:
- Extension of assessment statute – The IRS has three years to assess tax against you once you file a return. When you file 656-L, you agree to extend that time frame for the amount of time the IRS takes to review your application and for an additional year if the IRS rejects, returns, or terminates the offer.
- Extension of collection statute – The IRS has 10 years to collect most tax debts. This is also extended while the offer is pending and for an additional 30 days if the IRS rejects your offer.
- Liability – You are liable for the full amount of tax, interest, and penalties due until you meet all of the terms and conditions of the offer.
- Tax lien – The IRS can file a tax lien while your offer is under review. If your offer is accepted, they must release the tax lien within 35 days after you have paid the offer.
- Bankruptcy – If you file for bankruptcy before meeting the terms of the offer, the IRS can enter a claim into the courts for the full amount of the tax debt.
- Disputes after acceptance – Once the IRS accepts the offer in writing, you cannot contest the offer.
You can limit the extension of the assessment statute, but if you do, the IRS may return your offer. If you’re getting close to the end of the assessment or collection statutes, you may want to talk with a tax attorney before agreeing to extend either of those deadlines.
What If the IRS Rejects Your Offer?
If the IRS rejects your request for an offer based on doubt of liability, you have 30 days to file a protest. The IRS cannot take any collection actions during that time, but you lose the right to appeal if you don’t protest by the deadline.
What If the IRS Accepts Your Offer?
The offer acceptance will explain when you need to pay the offer. If you don’t pay the offer or fail to meet other terms of the agreement, the IRS can sue you or levy your assets to claim any amount between the offer amount and the original tax debt (minus payments, plus interest and penalties).
What if I paid the tax before the offer was accepted?
The IRS will give you a refund of taxes paid if you qualify for an offer based on doubt as to liability. Note, however, that in most cases, the IRS cannot refund payments more than two years after they are made.
Get Help With IRS Settlements
Want to settle your tax bill? Need help disputing an incorrect liability? Wherever you are in the process of dealing with the IRS, we can help. At Wiggam Law, we have helped many taxpayers successfully negotiate offers based on doubt as to liability, and we can help you as well.
To learn more about your options, contact us today. We can also help if you need to dispute state tax debt. Schedule a 30-minute consultation call with us or call us at (404) 233-9800 now to discuss your situation and get a sense of your options.