Many people avoid Tax Resolution because they believe the IRS never accepts offers. Don’t stress over the IRS.
According to the 2015 IRS Data Book, last year the IRS accepted 42% of Offers in Compromise, saving everyday Americans $204 million.
There are clear ways to identify which clients qualify for different Tax Resolution services. You will have a more successful Tax Resolution practice if you use discretion when choosing which cases to take on. Conduct an initial consultation to evaluate each case. Compare as much as you know about your client to these qualification lists to help you decide likelihoods of success and which clients to take on.
Offer in Compromise
To qualify for an Offer in Compromise, your client must meet all of the following conditions:
- Has filed all required federal tax returns
- Has made all required estimated tax payments
- Is NOT in an open bankruptcy proceeding
- Has submitted all required federal tax deposits (For those who are self-employed and have employees)
Other factors that will be considered and increase the chance of the offer being accepted are:
- The client owes at least $10,000.
- The client has received a bill for at least one tax debt.
To qualify for First Time Penalty Abatement your client must:
- Have filed all required returns
- Have paid, or arranged to pay, any due tax
- Not have any penalties for the 3 tax years prior to the tax year in which the penalty was received
There are three kinds of relief from tax, interest, and penalties on a joint tax return a client filed with their spouse. The kinds are Innocent Spouse Relief, Separation of Liability, and Equitable Relief.
The different kinds of relief have different qualifications, but your client cannot apply for any Innocent Spouse Relief if the IRS already accepted an Offer in Compromise (for doubt as to liability) for their liability.
Innocent Spouse Relief
To qualify for Innocent Spouse Relief your client must meet ALL of the following conditions:
- Must have filed a joint return which has an understatement of tax
- The understatement of tax must be due to erroneous items* of the client's spouse
- Must establish that they did not know there was an understatement of tax** at the time they signed the return
- After taking into account the facts and circumstances, the IRS finds it unfair to hold the client liable for the understatement of tax.
- Must request relief within two years after the date on which the IRS first began collection against the client (after July 22, 1998.)
Your client is NOT eligible for Innocent Spouse Relief if they had knowledge of the understatement.
*erroneous items: any deductions, credits, or bases incorrectly stated on the return, and any income not reported on the return.
**understatement of tax: the difference between the total amount of tax that should have shown up on the client's return and the amount of tax that was actually shown on the return.
Separation of Liability
If your client qualifies for Separation of Liability they will divide the understatement of tax on their joint return with their spouse. To qualify for this type of relief, your client must meet the following qualifications:
- Filed a joint return
Then, they must meet either of these requirements:
- Are no longer married to, or are legally separated from, the spouse with whom they filed the joint return for which they are requesting relief. (Under this rule, widowed counts as no longer married.)
- Were not a member of the same household as the spouse with whom they filed the joint return at any time during the 12-month period ending on the date the Form 8857 is filed.
Your client may qualify for Equitable Relief if they do not qualify for Innocent Spouse Relief or Separation of Liability. Unlike those other two types of relief, a client can get Equitable Relief from either an understated tax or an unpaid tax.
To further qualify for Equitable Relief, your client must meet the following conditions (in most cases):
- Filed a joint return for the tax year(s) at issue
- Filed a claim for relief in a timely manner
- Did not transfer assets with their current or former spouse as part of a fraudulent scheme
- Their current or former spouse did not transfer property for the main purpose of avoiding tax or the payment of tax
- Did not knowingly participate in the filing of a fraudulent joint return
- The income tax liability from which they seek relief is attributable (fully or partially) to an item or an unpaid tax on income resulting from the current or former spouse.
Note: The IRS will consider granting relief to your client, even if the understated or unpaid tax is attributable to them, based on certain exceptions. To learn more about these exceptions, visit irs.gov.
There are different requirements for qualifying for online payment agreements and installment agreements. Before applying for either, your client must file all required tax returns.
Online Payment Agreement
To qualify to apply for an online payment agreement, your client must:
- For individuals: owe $50,000 or less in combined income tax, penalties, and interest
- For businesses: owe $25,000 or less in payroll taxes
If your client does not qualify for an online payment agreement, they can still pay installments. To review the application process, click here.
If your client is a small business owner who currently has employees, they can apply for an In-Business Trust Fund Express Installment Agreement. These agreements usually do not require a financial statement or verification for application. To qualify for this type of agreement your client must:
- Owe $25,000 or less when the agreement is established. (If your client owes more than $25,000, they may pay part of the liability before entering into an agreement.)
- Pay their full debt within 24 months or prior to the Collection Statute Expiration Date, whichever comes first.
- Enroll in a Direct Debit Installment Agreement if amount owed is between $10,000 to $25,000.
- Be compliant with all filing and payment requirements
For more information on qualifications for Tax Resolution, visit irs.gov.
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