Academic journal article Journal of Accountancy

Strategies for Compromising Tax Debts: Three Lesser-Known Techniques May Improve Chances of Making a Deal

Academic journal article Journal of Accountancy

Strategies for Compromising Tax Debts: Three Lesser-Known Techniques May Improve Chances of Making a Deal

Article excerpt


* When pursuing collection alternatives for clients with a tax debt, practitioners may be most familiar with the "doubt as to collectibility" rubric for making an offer in compromise (OIC) to the IRS. Other grounds for an OIC and associated strategies, however, should also be explored.

* One alternative reason, "effective tax administration; may offer greater flexibility, since it can be based on the client's financial hardship or on public policy or equitable considerations. Another alternative grounds for an OIC, "doubt as to tax liability," should be pursued if the existence or amount of the underlying tax debt is in dispute.

* A second strategy that may be used to improve chances of acceptance of an OIC is to negotiate a collateral agreement with the IRS. A collateral agreement may be based on the taxpayer's prospect of greater future income or a waiver of unused losses.

* Practitioners should also aid clients by reckoning at an early stage with any issue that might arise concerning a "dissipated asset," one that has been sold or otherwise transferred on nonpriority items or debts.



Representing financially distressed individuals is becoming increasingly common with the economic difficulties many individuals and businesses have experienced in recent years. While tax practitioners know that a taxpayer can make an offer in compromise, some of the options available in making an offer are not well-known. This article addresses three techniques and strategies that may be useful for CPAs representing clients who owe a federal tax liability they are unable to pay in full: (1) exploring alternative masons for making an offer in compromise (OIC); (2) considering a collateral agreement with the IRS; and (3) making sure the taxpayer has addressed any issues arising from having transferred assets for less than full value on nonpriority items or debts ("dissipated assets").


When most practitioners think of an OIC, they think of a "doubt as to collectibility" (DATC) offer, where the taxpayer has insufficient income and assets to pay the full liability and the IRS allows a cash settlement on that liability However, doubt as to collectibility is just one of three possible reasons the IRS can accept an OIC. Practitioners should explore with their clients making an offer under the other two reasons: "effective tax administration" and "doubt as to liability"

Promoting Effective Tax Administration

Perhaps the most flexible alternative reason for an offer in compromise is to promote effective tax administration, or ETA. When considering ETA as an alternative, practitioners should understand that the Internal Revenue Manual (IRM) instructs IRS employees to consider ETA justifications as a last resort. However, the multiple elements under ETA make it an attractive alternative for many taxpayers. Under Treas. Reg. [section] 301.7122-1(13)(3), the IRS is allowed to compromise a tax liability based on ETA if (1) a financial hardship exists; (2) public policy dictates it; or (3) sufficient equitable considerations exist.

Financial hardship. A financial hardship, as it applies to ETA offers under Treas. Reg. [section] 301.6343-1, exists when a taxpayer is unable to pay reasonable basic living expenses. In most circumstances, the IRS will determine the existence of a financial hardship by reducing a taxpayer's income (generally consisting of gross wages, interest and dividends, net self-employment and rental income) by the prescribed national and local expense standards (see IRM 5.15.1 and However, the IRM does allow deviations from those standards if taxpayers can show that they are inadequate to provide for the specific situation. Unlike the normal deviation provisions that require reasonable substantiation that an expense is necessary to provide for the taxpayer's and the taxpayer's family's health and welfare and/or production of income, an ETA offer analysis can take into account more factors when departing from those standards. …

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