How to Settle Taxes Based on Doubt as to Liability
In some cases, the IRS allows people to settle their back taxes for less than they owe. There are a few different types of ways to settle your taxes, and in this guide, we look at offers in compromise based on doubt as to liability. This IRS tax relief program applies when a taxpayer believes they do not owe some or all of the tax debt.
Applying for a settlement based on doubt as to liability can be a complicated process. You need an in-depth understanding of the tax law. The team of tax attorneys employed at The W Tax Group can help you. To learn more, contact us today.
What Does Doubt as to Liability Mean?
Doubt as to liability means there is a doubt about the legitimacy or amount of your tax bill. To settle your taxes under this program, there must be a legitimate doubt about the tax liability based on current law. You cannot use this program if you simply don’t want to pay your taxes or can’t afford to pay them.
In some cases, even if there is a mistake on your return or a similar issue, you also cannot use this program. To help you understand when to apply for an offer in compromise based on doubt as to liability, this guide goes over several different scenarios and outlines what you should do.
How Does an Offer in Compromise Work?
An offer in compromise is when you make an offer to pay your tax debt for less than you owe. Then, the IRS reviews your offer and decides if it is willing to compromise. There are three different types of offers in compromise:
- Doubt as to Liability — As indicated above, doubt as to liability is when there is a credible doubt based on the law about your tax liability. To apply, file Form 656-L (Offer in Compromise Doubt as to Liability).
- Doubt as to Collectability — If you cannot afford to pay your tax liability, there is doubt that it will ever be collected, and the IRS may reduce the bill to the amount that can be collected. You can apply by filing Form 656-B (Offer in Compromise Doubt as to Collectability).
- Effective Tax Administration — This is when you can afford to pay your tax but doing so would hurt you financially. For instance, if you had a terminal illness and you could easily pay your tax debt by selling your house but selling your home would hurt you financially.
Doubt as to liability and doubt as to collectability have different application processes, and you cannot apply for these two types of offers in compromise at the same time. If you apply based on both doubt as to liability and doubt as to collectability, the IRS will return the application for doubt as to collectability.
In contrast, effective tax administration is a subsection of the doubt as to collectability application. If you cannot pay the offer calculated on your application, you mark effective tax administration. Then, you explain your extenuating circumstances.
When Does Doubt as to Liability Apply?
Doubt as to liability applies in a few different situations. Often, you have to apply for a resolution through another program. Then, if that doesn’t work, you can apply for an offer in compromise based on doubt as to liability. Generally, doubt as to liability comes into play when new evidence is available about your tax liability or when a tax examiner makes a mistake.
For instance, say that your tax return was audited and you disagree with the results of the audit. You can request an audit reconsideration, and if the IRS rejects your request, you can follow up by applying for an offer in compromise based on doubt as to liability.
Alternatively, imagine that you realized there was an error on your return so you file an amended return. The IRS issues an adverse response to the amended return so you apply for doubt as to liability. Because the rules are so complicated, you may want to consult with a tax attorney to ensure this is the right option for you.
What Are the Requirements for an Offer in Compromise Based on Doubt as to Liability?
Beyond there being a legitimate doubt about the tax liability, you also must meet the following criteria if you want to apply for an offer in compromise based on doubt as to liability:
- You have not already received a final decision about your tax bill from the courts.
- You are not involved in an open bankruptcy case.
- You are not applying to settle restitution.
- You have not already received an offer in compromise based on doubt as to collectability for the same tax year.
- You have not made an IRC 965(i) election for your s-corp.
If you meet these basic requirements, you need to look at your specific situation and determine if you need to do anything before you apply based on doubt as to liability. To help you out, the following section outlines what to do in several different scenarios where you may have an incorrect tax liability.
Other Options When You Have an Incorrect Tax Liability
Here is an overview of the most common situations where people have an incorrect tax liability. Each section outlines what you should do first. Then, it explains if you can apply for doubt as to liability in that situation.
Incorrect tax liability due to mistakes on your tax return.
If you made a mistake on your tax return, you need to amend it first. If the IRS rejects your amendments, you can appeal, request an audit reconsideration, or apply for an offer in compromise based on doubt as to liability.
Incorrect tax bill due to a substitute for return.
The IRS may file a substitute for return (SFR) when it doesn’t receive a tax return from a taxpayer. SFRs are notorious for mistakes. To deal with this incorrect tax liability, you simply need to file the return that you should have originally filed.
Incorrect tax liability after an audit.
If your tax liability is incorrect due to changes made during an audit, start by requesting an audit reconsideration. If you already paid the tax bill in full, you should file an amended return instead. In both cases, if the IRS rejects your reconsideration request or your amended return, you can move forward with the doubt as to liability application.
Incorrect penalties on your tax account.
This is not the same as an incorrect tax liability so you should not use the doubt as to liability program. Instead, you should request penalty abatement.
Incorrect tax liability after the IRS added income to your return.
This applies when the IRS adds unreported income to your return. For instance, imagine that an old employer sent a W2 to the IRS, and the IRS added that income to your return. However, you believe that W2 was sent in error.
The steps you should take vary based on the situation. When the IRS adds the unreported income to your tax return, the agency will send you a notice. Follow the instructions on the notice to see how to dispute the tax liability.
Incorrect tax liability due to Combined Annual Wage Reporting (CAWR) issues.
CAWR issues occur when there are inconsistencies between the wage reporting W2/W3 forms and the employment tax returns 941, 943, 944, 945, or 1040 Schedule H. If this happens, the IRS will open a CAWR case and send you a notice of the issue. Figure out which form has the mistake that is leading to the discrepancy. Then, refile that form with the correct information.
Incorrect tax liability due to employer misclassification.
There are different tax implications of being an employee or an independent contractor. If you believe that your tax bill is incorrect because your employer hasn’t classified you correctly, you should file Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding). After reviewing the situation, the IRS will adjust your tax liability accordingly.
Incorrect tax bill caused by your spouse or ex-spouse’s actions.
You can apply for innocent spouse relief if your spouse underreported income, and you didn’t know about (and couldn’t have reasonably known about) the issue. This generally leads to an incorrect tax liability when the IRS discovers the unreported income and adds it to your return retroactively. To apply for relief, file Form 8857 (Request for Innocent Spouse Relief).
How to File Form 656-L (Offer in Compromise Doubt as to Liability)
To apply for doubt as to liability, you need to file Form 656-L. The form requires basic information about you and/or your business if applicable. It also requires you to explain how much you think you owe and why.
The most important part of the form is the explanation. Because your claim for doubt as to liability needs to be backed up by legal codes, you may want to work with a tax attorney. Finally, you need to include any documents that support your argument.
Terms for an Offer in Compromise Based on Doubt as to Liability
When you apply for an offer in compromise, you have to meet certain terms or you can lose the arrangement. Here are the terms when you apply for doubt as to liability:
- You have to make payments voluntarily. If the IRS has to seize funds from you, they don’t count toward the settlement.
- You have 30 days to appeal if the IRS rejects your offer.
- If you miss the appeals window, you lose your chance.
- The IRS has the right to bring a lawsuit against you if you don’t follow through with the terms of the offer. The lawsuit can be for the original tax liability plus interest and penalties.
What to Expect While Your Offer Is Pending
After you submit your application, an IRS employee will sign it. At that point, it is considered to be pending. While the offer is pending, you remain liable for the tax bill, and you must allow the IRS to seize tax returns or other payments. However, the IRS cannot levy any assets while the offer is pending.
While reviewing your application, the IRS has the right to contact third parties to verify information as needed. By applying, you extend this right to the IRS. If the IRS doesn’t give you an answer within 24 months, your offer gets automatically accepted.
Get Help with Back Taxes Today
Disagree with a tax assessment? Think the IRS has overbilled you for taxes? Wondering what you should do? Then, contact us today. The team of tax attorneys employed at The W Tax Group can help you decide if you might qualify for an offer in compromise based on doubt as to liability.
If not, we’ll help you find the best tax resolution for your situation. Dealing with the IRS can be scary, but it’s a lot easier when you have a team of experienced professionals helping you out. Don’t let back taxes, unfiled returns, or incorrect tax liabilities stress you out. Instead, get help today.