This ground can apply if there is a genuine dispute about the validity of the liability. As a practical matter, this most frequently arises in trust fund penalty cases. But, it can also be used for other types of liabilities. Remember that an OIC is a compromise, so some payment must be offered, even if the taxpayer firmly believes that no tax liability exists.
For this ground to apply, there must be a genuine doubt to the validity of the liability. Since an OIC is a “compromise,” a client making an OIC on doubt as to liability is required to offer some payment, even if he or she believes that no tax liability exists. In deciding what amount to accept, the IRS will weigh the ‘hazards of litigation’. The hazards of litigation are what the IRS considers its chances of winning or losing in court, based on the law and facts. The greater the hazard, the greater likelihood that the IRS will accept a smaller payment
What is doubt as to liability?
According to Treasury Regulation (Treas. Reg.) § 301.7122-1(b)(1), doubt as to liability exists when there is an actual dispute as to whether the amount of the tax debt owed is correct or if the tax debt should have been assessed at all. As previously stated, there must be legitimate doubt as to whether the taxpayer owes all or part of the tax debt.
Warning: Doubt as to liability does not exist when the tax debt has been established by a final court decision or a judgment related to the amount of the tax liability or whether the liability actually exists (for example, if you went to Tax Court and lost your case).
Final Court Decision Offer In Compromise
In addition to having doubt as to whether the liability exists or the amount is correct, there must also be supporting evidence to create that doubt. In other words, you can’t just say you disagree with the amount that has been assessed and then have no documentation or legal authorities (if the reason creating doubt is based on case law or other legal authorities such as the Internal Revenue Code, Regulations, or IRS administrative rulings) to support your position. This documentation and/or legal authorities and the position you take are what should create legitimate doubt for both the taxpayer and the IRS. What this means is that the evidence presented must be able to change the viewpoint of the IRS on whether they made the correct assessment or whether the assessment remains valid, if it were so in the first place.
Note: Doubt as to liability OICs are conducted in a way similar to an audit reconsiderations, according to Internal Revenue Manual (“IRM”) § 184.108.40.206. Before embarking on any OIC based on doubt as to liability the taxpayer and/or their advisor, should always first consult with the IRM and research applicable case law together with the facts of the matter. A memo to the file documenting the facts and law, and why the matter qualifies for OIC doubt as to liability relief is crucial to avoiding waste of time and money.
Along with the supporting evidence, there must be a written statement from the taxpayer or their representative to the IRS explaining why all or a portion of the tax debt assessed is incorrect.
All of this information needs to be submitted along with a completed form 656-L Doubt As To Liability Offer In Compromise.
The Difference between OIC based on Doubt as to collectibility vs. doubt as to liability
As discussed above, there is more than one type of offer in compromise you can submit. However, you want to make sure you submit the offer that best fits your position. A doubt as to collectibility OIC is used when you are not disputing the amount of the tax debt that is owed. Instead, you are simply showing that based on your current financial situation or reasonable collection potential that you do not have the means to pay back the tax debt.
When to use doubt as to collectibility vs. doubt as to liability
A doubt as to liability OIC is used when you are actually disputing the amount of the tax debt owed or whether the tax debt should exist at all. Your financial situation plays no part in this process, rather the evidence you can use to show doubt is what will be used to have your OIC accepted.
You are also unable to submit both types of OICs at the same time. According to form 656-L, it is in your best interest to try and resolve any disputes you have about the validity of the tax debt before submitting a doubt as to collectibility OIC. If both are submitted at the same time, the doubt as to collectibility OIC will be returned.
Situations where doubt as to liability offers are applicable
First, doubt as to liability OICs are used only after the allotted time for disputing the assessment of a tax debt has expired. Typical situations where a doubt as to liability may occur are when there was a mistake in interpreting the tax law, an examiner failed to consider evidence that was presented, or new evidence was obtained that would constitute a change to the assessment.
In the case where incorrect information regarding income taxes or estate taxes or incorrect reporting of the value of stocks created a liability for a taxpayer, a doubt as to liability OIC may be applicable. The false information would need to be uncovered first and then a claim for refund be filed, if the taxes have already been paid. In that case, if the claim for refund is denied then submitting a doubt as to liability OIC would be an option, instead of filing a claim in the District Court. If on the other hand, the mistake was discovered before the taxes were paid, then instead of paying the taxes, and filing a refund claim, the taxpayer would arguably be able to file an OIC based on doubt as to liability. If the taxpayer prevails, then they would have done so without having to have paid the taxes and trying to get them back.
IRS offer in compromise doubt as to liability
Also, when a taxpayer is audited but, due to circumstance beyond the taxpayer’s control, they were unaware or unable to attend the audit and all items being audited were disallowed, causing a tax debt, a doubt as to liability OIC may be applicable. The taxpayer would of course need to be able to gather their evidence to support the items that were audited and if they are still able to file for an audit reconsideration the IRS wants you to go through this process first (but it is generally not required). IRS has been known to disregard its own procedural requirements and disallow a request for audit reconsideration, in which event, the taxpayer should then immediately prepare and submit an OIC based on doubt as to liability. Otherwise, the IRS will immediately commence collection action against the taxpayer and their assets.
Another example of when to use a doubt as to liability OIC may come after being assessed trust fund recovery penalties. If the IRS deems a taxpayer a responsible party for trust fund recovery penalties and that taxpayer at the time of assessment is not able to provide evidence to prove they are not a responsible party, they could potentially pursue a doubt as to liability OIC. This of course would only be possible if they later find evidence to prove they were not in fact a responsible party and should not have been assessed the trust fund recovery penalties.
A doubt as to liability OIC is not for all taxpayers. It is important to have us review your situation first to determine what route will best resolve your tax issue. If we determine that you have enough supporting evidence to prove that the amount of tax debt that was assessed is incorrect or that the tax debt shouldn’t have been assessed at all, we may determine that you have a case for submitting the OIC based on doubt as to liability. However, keep in mind, that you typically should exhaust all other options for disputing the assessment of the tax debt before submitting a doubt as to liability OIC. Furthermore, these types of offers can be even more complicated than a doubt as to collectibility offer. We recommend that you seek our representation/advice when pursuing this type of OIC.
Offer in Compromise Doubt as to Liability is an IRS Settlement option if you do not believe the back taxes you owe are correct. If there was an error made by the IRS, your accountant, or you, Offer in Compromise Doubt as to Liability can be filed to correct the error and reduce the taxes owed.
Doubt as to Liability – 2 Examples
Example 1 – 2017 Tax Audit
You obtain a free credit report. You notice a $15,000 IRS tax debt on the credit report. You are mystified. You do not owe back taxes as far as you know. You call the IRS to figure out what is going on. The IRS person tells you that your 2017 return was audited. Your initial reaction is ‘What audit?’ You were never informed of any audit. The IRS tells you that your return was audited a year ago and that they disallowed all your business deductions because you did not respond to the audit. You figure out that you relocated and the IRS did not have your forwarding address.
You can file Offer in Compromise Doubt as to Liability to fix this because you do not believe the IRS properly audited your 2017 tax return. You were not given the chance to provide the IRS all your receipts supporting the business deductions.
You can either file a request for an audit reconsideration or you can file an Offer in Compromise Doubt as to Liability to contest the audit done by the IRS. You offer $100 to settle the $15,000 of taxes. (You must offer more than $0)
The IRS reviews your receipts for the deductions. If the receipts support the deductions, the IRS will accept a settlement for $100.
Example 2 – 2018 Amended Tax Return
Your 2018 tax return was filed by a CPA. There is a $60,000 tax bill. You do not think the 2018 tax return is correct, so you find a new CPA. The new CPA reviews your 2018 tax return and noticed errors made by your old CPA. The new CPA recommends amending the 2018 tax return. If the 2018 tax return is amended, you will owe $20,000.
The new CPA files an amended 2018 tax return. The IRS never processes the amended 2018 tax return, for some reason. As a side note, the IRS is not required to accept and file amended tax returns. It has been two years and you still owe $60,000 for 2018. You can file an Offer in Compromise Doubt as to Liability with the amended 2018 tax return. You would offer $10,000 to settle the $60,000 of taxes.
The IRS Offer in Compromise unit reviews your amended 2018 tax return. If the IRS agrees with the amended 2018 tax return, the IRS will accept the $10,000 settlement.
Preparing Doubt as to Liability Offer in Compromise
Your Offer in Compromise should be well supported. This includes third party documentation and/or relevant tax authority. For example, if you believe the taxes owed should have been discharged in bankruptcy, are no longer payable due to expiration of the IRS collections statute (10 years from date of assessment) or were not actually owed in the first place, based on applicable tax law, you would provide the IRS with bankruptcy documentation or facts and citations to legal authorities supporting your position. You would also put a tax case together on why the IRS should remove the taxes. The following are sources for relevant tax authority.
Primary sources of tax authority:
– Internal Revenue Code
– Legislative Intent
– Treasury Interpretations
– Judicial Interpretations
Secondary sources of tax authority:
– Staff of the Joint Conference Committee
– Journal Articles
If you believe you are a candidate for OIC relief based on Doubt as to Liability, please contact us for an appointment to see if we can assist you.