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In debt to Uncle Sam? Make the IRS an offer it can’t refuse

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in Small Business Tax

The IRS isn’t totally heartless. If you’re stuck in a tax jam with no other options, you can use an “offer in compromise” as your get-out-of-jail-free card.

Strategy: The offer-in-compromise program enables you to settle up with the IRS over the amount it says you owe. Assuming that the agency accepts your offer, all you have to do is meet the stated obligations.

But don’t think that this is a slam-dunk. In fact, it recently became tougher for taxpayers to strike a deal. Reason: The new Tax Increase Prevention and Reconciliation Act of 2006 revised the offer-in-compromise program (see box at right).

In new guidance issued as a follow-up to the law (IRS Notice 2006-68, Fact Sheet 2006-22), the IRS says taxpayers can qualify for an offer-in-compromise only once they’ve exhausted the following options:

• Liquidating assets.

• Securing a loan. (The loan likely will be less than the amount that the client will owe the IRS, including penalties and interest.)

• Considering other payment options such as installment agreements.

Note: The IRS may reject any offer that it thinks is less than what the taxpayer can pay. If the IRS rejects the offer, it may make a counteroffer. Otherwise, you’re free to make another offer or appeal the IRS’s rejection.

You must send the written appeal within 30 days of receiving the rejection letter. Provide all the documentation you provided to the IRS when making the original compromise offer.

If the IRS accepts the offer, you’re expected to make all payments and file all future returns on time. Otherwise, the IRS can cancel its acceptance of your offer-in-compromise.

Then, you will have to pay the full amount that was originally due, plus penalties and interest.

Tip: The IRS expects to have the new Form 656 available at its Web site shortly. Visit

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