Why Offers Fail and Bankruptcy Often Makes More Sense
Offer in Compromise Versus Bankruptcy?
The tax solution providing hope to thousands of Americans is the the IRS’ “offer in compromise” program (“oic”). Savvy salespeople have realized that there are lots of Americans with tax debt who don’t sleep well. They offer the oic as a solution thousands of times every day on tv and radio both directly and in more subtle ways.
The promise one way or the other: Solve your IRS tax debt problem.
The implication or the thing the indebted taxpayer hears: They can help me get rid of my debt.
The problem: most taxpayers with serious tax debt aren’t good candidates for the oic.
So…a quick review. Via the oic program, the IRS is statutorily empowered to accept less than what they are owed if there is:
1. a doubt that they are actually owed the money
2. if there is a doubt about whether the debt that is owed is actually collectible from the taxpayer, or
3. the taxpayer can afford to pay the debt and taxpayer owes the debt, but there is some other circumstance about the taxpayers life that should be taken into account in settling the debt.
Most taxpayers file an oic based on a doubt as to the taxpayer’s ability to pay.
So why is an offer in compromise so often a failure?
1. The formula results in too large of a number – Taxpayers can’t afford it
The IRS is allowed to force each taxpayer who applies to settle their tax debt, to use a standardized budget in determining how much they have to pay.
In other words, everyone who files has to pretend that they live on the same budget as someone who possibly earns much less then them. This budget can, with the help of an experienced attorney, be planned for, added to, enlarged, but it is difficult to make it match the actual budget of many with serious tax debt.
The result is that when the taxpayers actual net income is compared to this budget, there appears to be some large excess income left to pay the tax debt with each month.
The IRS then multiplies this “excess” by a pre-ordained number and then adds that number to the taxpayer’s assets to arrive at a collection potential for the taxpayer.
If the “excess” number is 500 and the asset value is $5000.00, the IRS will claim that the taxpayer can afford to cough up $29,000.00
The problem is that the 500 is usually being used in real life to pay the taxpayer’s actual mortgage, credit card bills, or the 20 year old son’s car payment and insurance.
These are often items either limited or not allowed in the IRS’s standard budget.
2. The process can be difficult
The IRS purposefully makes the process difficult. It initially rejects the vast majority of offers. Many do not have the funds or desire to continue the fight.
3. Large amount paid upfront makes it more risky
The taxpayer must typically pay a large percentage of the debt with the offer or start making monthly payments equal to the offered monthly payment amount and loses those funds if the offer is unsuccessful.
4. If rejected, the debt comes back in full with interest
When rejected, the taxpayer still owes the entire debt with interest, while the statute of limitations period on the collection of the debt has been stayed.
5. Failure makes it easier for the IRS to collect
The taxpayer who has been rejected, has provided every detail about his financial life to the IRS making it easy for them to collect the debt.
6. Full compliance is often a problem after acceptance
IF the offer is successful, the taxpayer must file tax returns and pay tax obligations for 5 years, if not, the offer is over, the money paid is lost, and the total original debt with it’s accrued interest, continues to be owed, minus what has been paid.
7. Offer in Compromise is not a complete solution
Often, the taxpayer proposing the offer in compromise has medical bills, credit card debt, personal loans, state tax debt etc. all of which must still be dealt with outside of the offer in compromise. The payments on these debts aren’t typically allowed as part of the budget in calculating the reasonable collection potential of the taxpayer. The offer, at it’s best becomes only a partial solution as a result.
For these reasons and many others, the vast majority of oic’s fail. In a given year, less than 30% of offers submitted are successful. In 2007, it was closer to 25%.
There are other solutions like the use of a payment plan in combination with the statute of limitations period on collection, and bankruptcy, so make sure a reputable professional reviews all of your past, present and future finances before diving into an offer in compromise.
