An entire industry now exists based on the promise that the IRS will settle your tax debt for just a fraction of the total amount. This promise is implied in ads all over the TV, Radio and Internet. Many call the companies in this industry IRS Offer in Compromise “mills” or just “offer mills”. They deal in volume, and many of them simply place numbers on forms and throw the forms against the proverbial IRS wall to see if they will stick.
Most don’t stick, the unfortunate filer is out what is often thousands of dollars in fees and because the filing has stopped the 10 year debt collection statute the IRS is governed by, he or she is back where it all began…plus interest.
24,000 offers were accepted in 2018 according to the IRS 2018 Data Book(18databk).
This means that of the millions of people with tax problems only a very small percentage actually filed and successfully complete an offer in compromise. 24,000 divided by 50 states is 480 successes per state; But if you look at the success rate by population instead, Arizona may have had less than 150 successful offers filed in 2018.
Having said that, it is possible under the IRS Offer in Compromise program to settle tax debt for less then what is owed and sometimes significantly less.
But before you file an offer you have to understand a few things about it.
1. The program is built to benefit the IRS and not you. The IRS will only accept an offer if it absolutely convinced that the offer amount is greater then it would be able to collect from you over the course of the remaining statute of limitations period on collection. It doesn’t settle debts the same way that a credit card creditor does.
2. Most successful offers require an extensive amount of analysis and planning before they are ever filed. Once you understand how offers in compromise work, you will understand how you can make your chances of success greater with some planning.
3. Even if an agreement is reached on an OIC, you must maintain a perfect tax record for 5 years afterwards. No late filings and no late payments or it all starts over.
4. An OIC stops the 10 years clock on collection and most Offers take a year or more to finalize. If the offer is rejected in the end….you are back where you started.
5. An OIC “tolls” the 240 day time-frame for bankruptcy purposes. (and possibly other important dates as well) If a bankruptcy is a potential option down the road, you will want to strongly consider timing issues.
6. There may be other/better options. Especially where income is low and there isn’t much time left in the IRS statute of limitations period.
TYPES OF OFFERS
There are three kinds of Offers or “OICs” that the IRS will consider
1. OIC based on a Doubt as to Collectability
The IRS calculates the minimum amount it will accept based on an “objective” formula. The formula is fairly simple. Net value of assets plus an average net income number per month (gross average income minus IRS’ allowable living expense budget) multiplied by either 12, 24 or length of time remaining in the statute of limitations period.
2. OIC based on Efficient Tax Administration
This is an OIC that allows for less to be paid to the IRS in settlement than the minimum amount calculation in an OIC based on Doubt as to Collectibility. This is because the IRS will consider special circumstances and unique economic hardship factors.
3. OIC based on a Doubt as to Liability
If the IRS Debt has calculated the debt incorrectly, this type of offer can be used to challenge it when other administrative options haven’t worked.
REPRESENTING YOURSELF IN AN OIC
If you are a w-2 employee with minimal assets and a small chance of higher future income, you should be able to prepare, file and negotiate a basic offer in compromise on your own. Even in such a situation, it is important to get some advice at the outset from experienced counsel just to make sure nothing is missed.
If your situation is more complex and involves IRS collection, un-filed returns, defaulted agreements, property issues, business ownership, rental property ownership, non-liable spouses and other unique circumstances, you should absolutely seek advice and representation from an experienced professional.