Let me set the stage for you. It’s a Thursday, the week’s almost done, you’re about a third of the way through the month, you’re already making your weekend plans (a combination of chores and recreational activities), when suddenly, you remember you haven’t checked your mailbox since Monday. Of course, you’re not too concerned, your bills are paperless (and automated), you’re not expecting any postcards or letters from family — not that they wouldn’t be a nice surprise — but for the most part, you anticipate a bouquet of irrelevant ads and coupons. You walk the arrangement of recycled paper coupons to the recycling bin and dump anything not sealed in an envelope. You’re left with a handful of letters, one for internet service you’ve never heard of, another from a local dealership, and then you see something that makes your heart drop to your stomach. A heavy envelope from the IRS saying, in big, bold, thick red font “OPEN IMMEDIATELY.”
There is nothing worse than finding out you owe more taxes and worse, that you now owe interest on those unpaid taxes. It rapidly turns an innocuous chore into a panic attack. If you owe taxes, your best move is to contact a CPA (especially if you already have one) to figure out it’s authenticity and if so, what to do next.
In some cases, the IRS has the information wrong. We’ve seen this happen when people own a percentage of equity in a company (but it gets misrepresented as a higher percentage or total ownership), expats often struggle with this (paying taxes in more than one country), or when someone owns multiple income properties but does not technically work (a traditional job). And in some cases, it’s simply a clerical error. Whatever the reason, if you believe this is in error, it’s best to file a dispute and provide supporting documentation.
If however, the IRS denies your motion or fails to examine the evidence you put forth, then the appropriate action is to file Form 656-L Offer in Compromise, i.e. Doubt as to Liability.
If you have reasonable doubt (and especially if you can prove it) to the IRS claim that you owe tax debt, then here are a handful of things you should know before you file.
First, this was already mentioned above, but it bears repeating, you do not need to fill out this form until your initial dismissal has been revoked. In some of the examples above (such as a clerical error), it’s an honest (albeit mortifying) mistake that’s remedied. If however, your claim isn’t accepted, then you should file Doubt as to Liability.
The next most important factor will be evidence. If you can confirm with paperwork, bank statements, W2s, etc. that you do not owe the amount they claim, then you should file Form 656-L along with all supporting documents (make sure you keep copies).
Occasionally, through the process you’ll find you do owe taxes but not necessarily the amount they claim you owe, in that case, you should also file this form. This isn’t an all-or-nothing scenario. If you recognize you do owe more taxes, but not the full amount the IRS claims, you can still argue the doubt as to liability.
The form should be submitted with a written statement accompanying it and any supporting documents you can provide.
At this point, it’s worth noting that you can’t argue doubt as to liability if the tax debt owed is court ordered — in other words, if you take your case to tax court and lose, there is no room for negotiation or dismissal.
When is Doubt as to Liability Applicable?
An important aspect of this form is that you can only apply when the agreed upon time for disputing the tax assessment has ended. Again, when there was simply a mistake when interpreting a tax law, that could change the tax assessment, or if the examiner made a clerical error.
However, if the assessor does not consider the presented evidence, then Doubt as to Liability is applicable.
It may also be applicable in case there was a false data regarding the wages you made. It can also happen when an inaccurate recording of the stock’s value led to the taxpayer’s liability. Any false information will need to be documented with supporting evidence before filing a refund claim. If the refund claim is denied, you may file Form 656-L, Doubt as to Liability.
Another circumstance this action can apply, is if the taxpayer allegedly owes more, but the taxpayer is not available due to some circumstances (again, expatriates often face this issue). If all the audited items are disallowed and cause a tax debt, then this form is applicable as well.
To avoid penalties, gather the appropriate evidence, and follow the best course of action for an Offer in Compromise, you should use a CPA. They’ve been through this process, have studied it and can provide confident guidance in the actions you take.