Taxpayers have several options for resolving their federal tax debts. They can request a monthly payment plan, submit an offer in compromise, or seek bankruptcy protection. I spoke with David A. Bauman, an enrolled agent, who works for JK Harris, about the advantages and disadvantages of filing an Offer in Compromise.

Good afternoon, David, and thank you for taking the time to talk to me today. How do you help taxpayers solve their problems with IRS tax debts?

The tax professionals at JK Harris help individuals and businesses evaluate all their options for dealing with tax debts. We will prepare a financial statement for clients based on their unique financial situation to determine which tax debt strategies are best for each client.

What are the options for dealing with tax debts?

Taxpayers have five alternatives for resolving IRS Collections activity: setting up an installment agreement, setting up a partial-pay installment agreement, submitting an offer in compromise, filing for bankruptcy, or being declared not currently collectible by the IRS.

How do you know if a particular debt strategy is appropriate for a client? Everything depends on the client?s unique financial situation. We examine the client?s ability to pay. If the client cannot afford to pay his tax debts in full, the offer in compromise program may be a good option.

In particular, we examine the client?s monthly disposable income. If there?s sufficient disposable income, we generally recommend that the client set up an installment agreement or a partial-pay installment agreement.

If the client is making enough income to cover expenses and is more or less breaking even, then we may recommend an offer in compromise. However, if the client spends a lot of money on expenses, which the IRS will disallow, we may recommend that the client consider bankruptcy as an alternative.

What?s the biggest factors in determining whether an Offer in Compromise will be successful?

The taxpayer must be in compliance and must have the ability to pay and to borrow. The IRS will not approve an Offer in Compromise if the taxpayer is not in compliance with the tax laws. For example, the taxpayer must be current on estimated tax payments or federal income tax withholding, must be making payroll tax deposits on time, and must have filed all tax returns. The ability to pay and to borrow is measured by the Reasonable Collection Potential.

Which tax debt strategy do you prefer?

Generally, we prefer that a client set up an installment agreement or an offer in compromise. Installment agreements and offers in compromise are contracts between the taxpayer and the IRS. As long as the terms of the contracts are being fulfilled, the IRS won?t bother the taxpayer.

What about partial-pay installment agreements, where the taxpayer makes monthly payments but ends up paying less than the full amount owed?

Partial-pay installment agreements can be easier to get than an offer in compromise. However, unlike an offer or a full-pay installment agreement, the IRS can re-evaluate the terms of a partial-pay installment agreement every two years. For example, if the IRS thinks the taxpayer can afford to make bigger payments, then the partial-pay installment agreement might have to be re-negotiated. The taxpayer can request re-evaluation at any time should his circumstances change to such a degree that the agreed upon payment can no longer be made.

How does a taxpayer request a partial-pay installment agreement? Taxpayers should submit a written request for a partial-pay installment agreement to the IRS Revenue Officer assigned to their case or to the Automated Collection System unit handling their account. If the taxpayer wishes to set up a partial-pay installment agreement before either of the two IRS interactions sited above, a written request may be submitted to the Service Center where the taxpayer files his tax return. A Collection Information Statement (IRS Form 433A) also needs to be submitted, just like an offer in compromise.

So does this mean the taxpayer needs all the same documentation as an Offer in Compromise, such as three months of bank statements, and so forth?

Yes, the taxpayer will need to submit documentation to support the information on the Collection Information Statement.

_{David Bauman's Interview is spread over four pages:}

1. Tax Debt Strategies, When an Offer in Compromise is a Good Idea, & Partial Pay Installment Agreements.
2. No Documentation, Effective Tax Administration, Paying an Offer in Compromise.
3. Do It Yourself or Hiring a Tax Professional for an Offer in Compromise.
4. Offer in Compromise Process, Professional Fees, 10-Year Statute, About David Bauman.