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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • Should I use an Offer in Compromise to deal with my IRS Debt?

    proper-preparation-prevents-presentation-predicaments-thumb-375x326-56592Should I use an Offer in Compromise to deal with my IRS Debt?

    Unfortunately, misleading tax resolution advertising has resulted in a the widespread belief that an IRS Offer in Compromise is really just a matter of filling in some blanks on a form and mailing it in.  In reality, there are a several issues to think about before you should ask the IRS to settle the debt you owe.

    Issue Number One – Is the IRS going to accept less than the full amount owed and consider the debt “settled”?

    The IRS Offer in Compromise program is real, and for certain people it works pretty well.  For most people who try it, failure is the result.  The primary reason it only works about 30% of the time is that the IRS gets to determine what your “reasonable collection potential” (RCP) is.  It uses a formula to determine this RCP and in doing so it considers your past, present and potential income, your budget, what it believes your budget should be, as well as your assets.   It uses this RCP because it would rather settle with you and let you get on with your life… but it doesn’t want to settle for an amount that would leave money on the table before the statute of limitations period runs out.  The RCP allows the IRS to calculate whether the settlement you propose would leave money on the table.

    The primary problem that the RCP represents to the taxpayer is that the IRS uses numbers to determine the budget which may be far less than the taxpayer actually spends each month.   Taxpayers don’t understand this and tax “relief” outfits tend to prey on ignorance in this regard in order to perform a little bait and switch.

    Before filing an Offer, you should have someone with lots of experience with and understanding of how the IRS calculates budgets, income, and asset value review your situation and give you the real “low-down” before proceeding.

    Issue Number Two – If the IRS revenue officer tells me to file an Offer in Compromise, does that mean I should?

    The IRS Revenue Officer isn’t the decision maker.  An OIC department exists for the purpose of deciding initially whether an offer should be accepted.  A revenue officer has some good insight as to whether an offer will be accepted but they can and are often wrong.

    A side-note – Many people are relying on the IRS Offer in Compromise Calculator to determine whether they should file an offer in compromise.  We don’t think this calculator is built for the purpose of actually giving you a good answer.  It will often overstate or understate your number.  Don’t rely on it.

    Issue Number Three – There isn’t a specific percentage of tax owed that the IRS settles for.

    The amount the IRS agrees to accept is primarily based on a formula and that formula uses your income, budget and assets: past, present and future to determine the amount.  The offer isn’t a disclosure form… it is a legal claim.  You will have the burden of proving that the amount you are offering is the RCP the IRS should base it’s acceptance on.  Every aspect of your claim is scrutinized and challenged.

    Unfortunately tax “resolution” outfits tend to give off the impression that a specific percentage of the debt is standard across the board.  This is just a marketing technique.  Don’t be fooled.

     Issue Number Four – How do I know whether I should file an Offer in Compromise?

    A lawyer, CPA or enrolled agent experienced in the Offer in Compromise business needs to review your tax debt, statute of limitations period, income, budget, assets and past/future income, budget and assets before an good estimate of what the IRS may accept can be determined.

    There are a number of downsides to filing an Offer that have to be considered as well like:

    • You may be required to pay something to the IRS when the Offer is filed AND that money is lost if you lose.  
    • The 240 date required to accrue from the date a tax debt is assessed before a bankruptcy can discharge the debt is stopped by the Offer filing
    • The IRS statute of limitations on collection is extended, which has a potential negative effect on the RCP and will result in starting where  you began if the offer fails
    • There may be better options in terms of the elimination of the debt than an Offer in Compromise

    Issue Number Five – Should I get help?

    Some companies simply fill out the necessary documents and submit them.  If this is your company, it probably isn’t doing anything you can’t do yourself.  With some good explanation and education about how offers work, most consumers can handle a basic offer in compromise themselves.  More complex cases require help and that help should be provided by a firm that aggressively plans/argues these cases and has a high success rate.  (A high success rate is mostly the result of wise case acceptance)

    We see many people who have used shoddy companies or who have done the offer or multiple offers themselves when their situation is complicated.  That hurts the ability to use other options and costs money and time.

    How can we help?

    We have analyzed, planned, prepared and filed many offers in compromise over the years.  We no longer file them as we think that there are many non-attorney firms that are capable of doing this work well and we believe that many people can do them as well with some basic guidance.  When we analyze a bankruptcy case we are also looking at whether an offer in compromise makes more sense than bankruptcy.  We tell our clients our findings and if the offer makes more sense, give them guidance re how to take the case forward.