No single IRS resolution strategy is marketed with more verve and breathless urgency than the Offer in Compromise strategy (aka Tax Settlement). Tax relief companies tout this strategy as a surefire “pennies on the dollar” sweepstakes that you can’t afford not to pursue. You may have even heard first-hand stories from friends who owed six figures to the government, but then magically negotiated that liability down to a scant few hundred dollars.
The truth is, an Offer in Compromise is an option for some delinquent taxpayers, but qualifying isn’t as easy as the advertisements imply. If your tax liability is significantly less than your “net worth” — the combined value of your assets minus your liabilities – you likely will not qualify for an Offer in Compromise. Even if your net worth is far less than your IRS liability, high-income earners may also have trouble qualifying.
In short, the Offer in Compromise strategy is far more complex and time-consuming than any of this marketing literature would have you believe, and you need a professional to help you (a) determine if you qualify and (b) navigate the landmine-laden process of submitting and negotiating for an Offer in Compromise.
How Do I Know if I Qualify?
The IRS provides literature with the Form 656, Application for Offer In Compromise that is intended to help you determine if you will qualify. It also provides a multiplier (an equation) to help you determine what your Offer amount will be, based on your leftover income. That pamphlet may instruct you to multiple your “leftover income” (the amount of income you have left over after meeting all allowable living expenses, such as housing/utilities, miscellaneous expenses, transportation expenses, etc.) by 12 or 24. If you plan to fund your Offer within five months of acceptance, they instruct you to multiply that leftover income by 12. If you plan to fund your Offer via “periodic payments” over 24 months, they instruct you to multiply your leftover income by 24.
Unfortunately, this equation neglects to prepare you for how the Offer in Compromise Examiner (the person who will review and make the initial decision regarding your Offer) will calculate your tax settlement amount. Such factors as the amount of time left on the Collection Statute Expiration Date (the deadline by when the IRS can no longer legally collect what you owe) or whether certain recurring monthly expenses will expire, may come into play and increase the settlement amount (or disqualify you).
These examiners are also notorious for disallowing expenses that ought to be allowed and overvaluing assets—either method can result in a far higher settlement amount than that for which you qualify, or an outright rejection of your Offer. Simply put, you will want a trained professional to review your finances, the status of your tax debt, and help you reach a conclusion as to whether you qualify.
Additionally, the IRS website offers a “qualifier” tool whereby you enter your income and assets to see if you qualify. I tried this tool before preparing this blog, and the system reported technical difficulties. Unfortunately, you often cannot count on IRS resources to help you navigate this problem.
What to do Before Filing IRS Form 656
The first thing you should know about the challenges you will face with an Offer in Compromise, is that, unlike Installment Agreement discussions, the Offer negotiation process can seem to drag on forever. From the date the IRS receives your Offer in Compromise to the date you receive an official acceptance letter, the wait typically exceeds six months, and sometimes extends beyond one year.
If you are filing an IRS Offer in Compromise for an individual, the wait tends to be shorter. If you are filing on behalf of a business, perhaps including multiple business officers who are also trying to settle Trust Fund Recovery Penalty liabilities, the wait will likely be much longer.
You should not expect to be able to refinance your house, engage a factoring or funding company to help your business, or in any way rid yourself of an IRS tax lien within a few months after filing the Offer in Compromise. The reason for this is because even if your IRS Offer in Compromise is accepted within a short period of time, your tax lien will not be removed from your home, and the debt considered settled, until after you fund your Offer. And if you are paying your Offer amount by way of “periodic payment” (monthly installments toward the Offer amount over 24 months), this means your tax lien will remain for perhaps a little over 2 years after acceptance.
The best way to speed up this process is to ensure that your Offer is complete to begin with, and then be prompt in providing additional financial documentation when the IRS asks for it. Taxpayers frequently waste valuable time in the Offer process by sending in incomplete Offers, or by sending in documentation that is too old.
Generally, if the documentation is more than six months old at the time they review it, the IRS will ask for new documentation to support your financial hardship. If you have unusual or extraordinarily high living expenses for one reason or another, you need to be prepared to submit the right kind of supporting documentation to get these expenses allowed. Your failure to do so can slow the Offer process down considerably. If an Offer Specialist receives your Offer and can’t support your expenses with the information in the file, or if the information is too old, they will ask for more documentation.
If you fail to comply, the IRS may do one of 2 things: (1) The IRS may “reject” your IRS Offer in Compromise and offer you the right to appeal this rejection. If you exercise your right to appeal within 30 days, the IRS will send your case to a Settlement Officer in Appeals, where they will conduct a review of the file, and perhaps ask you for more information. (2) The IRS may “return” your IRS Offer in Compromise. If the IRS returns your Offer in compromise, you are afforded no appeal rights, and your case is sent back to IRS Collections. A return is common if you fail to provide documentation when asked, or if you are no longer in compliance with the tax laws, e.g. you have missing tax returns, or accrued additional tax liabilities during the wait for your Offer to be reviewed.
It is vital that you verify whether your IRS Offer in Compromise is being returned or rejected. The difference is crucial. A returned Offer means you may be exposed to imminent bank levies, wage levies, or seizure of assets. If, prior to the Offer, you had been suffering from enforcement measures by the IRS, such as bank levies, wage levies, or the threat of seizure, the long wait you experience as the IRS reviews your IRS Offer in Compromise may be welcome. As such, having your Offer immediately returned, and your case sent back to Collections, could be disastrous.
A rejected Offer, on the other hand, means you have the right to fight another day, without being subject to enforced collection action first. Sometimes Offers are incorrectly “returned” when they should be “rejected.” An attorney experienced with tax relief can help you fight those battles, and win.
Often, rather than rejecting or returning the Offer, an Offer Specialist at the IRS may respond with a request that you increase the amount of your Offer. Remember, the IRS uses a mathematical formula to determine an acceptable settlement amount. Your income, your allowable expenses, and the equity in your assets make up a long list of factors that go into this mathematical formula. It is very common for an Offer Specialist to disagree with your calculations about your income, your expenses, or your net equity in non-exempt assets.
In order to maximize the amount you will settle for, the Offer Specialist may try to overstate your income, disallow certain expenses, and/or overvalue your assets. If they do so and ask you to increase the amount of your offer, it’s important to read the Offer Specialist’s counteroffer carefully. The Offer Specialist may be using select information from a select time period in order to inflate your Offer amount. Alternatively, the Offer Specialist may have disallowed certain expenses which, in fact, should have been allowed.
Do not let an Offer Examiner drown your Offer with shoddy math or hurried denial of legitimate living expenses. A good attorney or tax negotiator can counter with substantive information or other circumstances that would increase your “allowable” expenses, or lower your income, or both. The IRS is required to allow you to meet any expense that is necessary for your own production of income, and for the health and welfare of your family. This can be as broad and as narrow a definition as the Offer Specialist wishes it to be.
Within these confines, a good negotiator – preferably an attorney – can make detailed arguments that support why your denied expense is necessary for you to live, or why it is necessary for you to earn money. As the saying goes, you have to spend money to make money. This is often as true in a household as it is in a business.
For instance, an Offer Specialist may insist that your home’s rent or mortgage is outside the monthly guidelines of what you should be allowed in your county. But you may argue that your use of your home enables a certain percentage of your income to be larger than it otherwise would be. And this doesn’t necessarily need to result from using a home office for work. Your home location could be uniquely located to a bus line, or your work location, thus enabling you to save money in other areas, and “increase income” by those means. The different arguments to be made are as varied as the circumstances of life.
Similarly, despite the new “Fresh Start” rules that allow businesses to omit “income producing assets” from the Offer calculation for the first time ever, the IRS may insist on including equity in certain “income-producing” assets within your Offer amount, because the Offer Specialist disagrees with your belief that they are “income producing.” For example, the IRS may insist that, because your hauling business has two dump trucks, one of those dump trucks is unnecessary for the production of income. It will be incumbent upon you or your representative to explain why the second dump truck is necessary, and perhaps even go as far as calculating how much income a given dump truck produces.
Often, citing the work of local competitors, and the fact that they have multiple dump trucks, is one method for explaining your need for two. Alternatively, if you have multiple employees who are qualified to operate commercial vehicles, you can argue that you need both drivers working simultaneously, and therefore multiple trucks. Perhaps you can argue that the trucks have brought in business by way of marketing your company name, which is inscribed on the side.
A good representative can ask you the right questions to elicit the information he or she needs to make a creative, and ultimately successful, argument. As such, the right or wrong representative could be the difference between paying thousands less – or more – to the IRS in a settlement.
While “errors” made by an Offer Examiner very often favor the IRS (no surprise there), my colleagues and I have seen numerous occasions where the Examiner’s error favors the taxpayer. An attorney experienced with tax relief cases should easily be able to spot these errors. And keep their mouth shut. Individuals representing themselves sometimes unwittingly raise such findings only to alert the Examiner of the error. Knowing what to say, what not to say, and when to say nothing can make a world of difference in the final settlement amount.
More so than any form of tax relief, it is worth it to have an attorney who is experienced and skilled with tax relief cases in your corner. OIC’s only have a 25-35% chance of being accepted. A good pro can triple your chances of success. A good pro can also negotiate a far lower settlement than you could on your own. In other words, chances are good that you will save a lot more than the fee you pay a good tax relief pro.
Keep in mind that an unsuccessful attempt at an OIC can easily chew up a year, during which time penalties and interest continue to accrue. A good pro will prevent you from wasting an entire year and instruct you not to pursue an OIC if you aren’t going to qualify. Finally, there is a decent chance the money you use to pay a tax pro to help you “win the OIC sweepstakes” will be money that would otherwise get baked into the settlement amount and wind up going to the IRS anyways.
If you are curious whether you might be a good candidate for an Offer in Compromise, call Fortress Tax Relief. We have caring and knowledgeable professionals on staff who can assist you in determining whether you qualify for a tax settlement (or other money saving tax relief programs). There is no charge for a telephone consultation, so pick up the phone and call Fortress Tax Relief today.