Strategies and Ideas For Dealing With Tax Debts Effective Tax Administration ETA

In today's economic climate more and more individuals and businesses are becoming distressed as it applies to their financial conditions. One of these conditions can be the amount that they owe to the IRS for taxes. However, there are three ways to address taxes owed that will prevent the taxpayer from incurring large penalties and fees because they are under the impression that they lack the ability to pay the tax debt. Each option will be discussed in separate articles.
Most individuals are unaware that a taxpayer can offer a compromise to pay the debt to the IRS. There is a method that individuals can use to settle a debt without incurring penalties and fees, and in some cases lower the taxes paid to the IRS. In the world of the IRS this method is more commonly known as an "offer in compromise" (OIC).
There are three strategies that can be utilized in making an OIC by an individual, they are:
The first strategy that can be used by the taxpayer in making an OIC would be to use the classification of promoting Effective Tax Administration (ETA). This strategy is the most flexible OIC strategy. When using this strategy the individual should be aware that the IRS agents are instructed to use this as a last resort in the process. Despite this, under Treas. Reg. ?? 301.7122-1(b)(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.These multiple elements under ETA make it an attractive alternative for many taxpayers who are looking to settle a tax liability.
1. Financial Hardship:
Under federal regulations, financial hardship exist when the taxpayer is unable to maintain reasonable basic living expenses. In most instances the IRS will then determine the existence of financial hardship by reducing the taxpayer's income by the prescribed national and local expense standards. The taxpayer may argue that the guidelines should be deviated from where the taxpayer can show that they do not apply to that particular situation. The ETA, unlike, other offers can take into account the taxpayer's total circumstances and situation in making an offer in compromise. This option should be used when the amount is substantial and there is no way to make payment without cause hardship to the taxpayer.
2. Public policy argument/Equitable considerations:
These two strategies are generally classified together, and used simultaneously. This is due to the IRS' ability to compromise a liability based on public policy and equitable considerations. If the taxpayer can show that forcing full payment would undermine the public's confidence that the tax laws are being administered in a fair and equitable manner, this option is available. In using these arguments the taxpayer should be aware that there is no available rulings for review, however, the regulations have provided examples to make a case for using this strategy. In one example (Treas. Reg. ?? 301.7122-1(c)(3)(iv), Example 1), the taxpayer suffered a serious illness that required continuous hospitalization for several years and left him unable to manage his financial affairs. Once he recovered, the taxpayer immediately filed his delinquent taxes, and his overall compliance history was not so egregious as to outweigh the justifications for settlement. In another example (Example 2), the taxpayer received written instructions from an IRS employee related to an IRA rollover period, only to discover during an audit that the instructions were incorrect. So, in using this strategy the taxpayer should research the particular situation prior to making an offer.
3. Doubt as to Underlying Tax Liability:
A taxpayer who submits a Doubt as to Underlying Tax Liability (DATL) offer is stating that they disagree with the tax liability or the amount that is owed. Just as any option the DATL has its positives and negative aspects when considering it as an option. The negative is that the DATL cannot be used when the tax issue has been ruled on by a court. The second negative is the procedural aspect of using this option. The procedure has been changed to deny the ability to submit three choices when submitting an OIC. Basically there are more forms to fill out when selecting this as an option.
The positives in using this option is that the taxpayer does not have to reveal extensive amounts of personal financial information. Secondly, the tax courts are more taxpayer friendly when addressing the information before them. This option can be cheaper to the taxpayer as opposed to taking the issue to the tax court. Additionally, the IRS treats a DATL as an audit review, and evaluates the potential cost in addressing this option, which may be more economical to settle than contest.
There are many options for the taxpayer to address a tax liability with the IRS. The above is just one of three that can be utilized by a taxpayer to address their individual tax liability. For more information or assistance in address your tax or legal concerns visit for information on how to address your concerns without the expense of an attorney.