Successfully Negotiating IRS Offers in Compromise
Part 1: Traps for the Unwary
- OICs are for people who made an honest mistake, and repent of past sins – acceptance of an OIC means you are on probation and can’t do anything else wrong with your taxes for 5 years. If the tax assessment is for something egregious or dishonest or if your tax history is atrocious, getting an OIC will be extremely difficult.
- OICs are for people who have already corrected any problems with their accounting/reporting and are not in danger of missing a deadline or making an error that will cause their OIC to be unwound under the 5 year rule.
- OICs are not just a “math problem.” They require a balancing of equities. You must have a sympathetic case where the IRS will agree that collecting the full balance would be inequitable.
“Pennie’s on the Dollar” and Other Myths Dispelled
- OICs are not settled for Pennie’s on the Dollar. It goes by income/assets available.
- OICs are not a way to balloon your tax debt for a decade and get a one-time Get Out of Jail Free Card. OICs are not for repeat offenders.qOICs are not a way out of arguably criminal or grossly negligent abuse of the tax laws. The IRS always takes “Effective Tax Administration” into account and tries for parity.
- OICs are not an arm’s length “negotiation,” but a matter of grace and mercy. Remember Mr. T, playing Clubber Lang when he said, “I pity the fool. It’s gonna be over real fast.”
- OICs are not an ask-and-see-what-they-say proposition; you put your best foot forward and follow the guidance. This is a case of “pigs get fat, hogs get slaughtered.”
Part 2: Is an Offer-in-Compromise Right For You?
- 5 Year Tax Probation – You must timely file and pay all taxes for a period of 5 years or the Offer will default and be reversed. When an OIC is declared to be in default, the agreement is no longer in effect and the IRS may then collect the amounts originally owed (less payments made), plus interest and penalties. Additionally, any refunds due within the calendar year in which the offer is accepted will be applied to the tax debt.
- Non-Assessed Taxes – If you successfully receive an Offer-in-Compromise but have underreported and underpaid the taxes for one of the years in the OIC agreement and then get audited, the new liability may blow your Offer-in-Compromise, but at a minimum, it will not be included or inoculated from collection, even if taxes for that period were already wiped out in the OIC.
New Current Compliance Requirement
- All required returns must be filed, or an Offer-in-Compromise will be returned without processing. IRS Tax Topic #204 (https://www.irs.gov/taxtopics/tc204) and FAQ 1 (https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise-faqs). An Offer-in-Compromise will also be returned while pending if new tax debts arise. New Requirement (instituted March 27, 2017).
- Estimated tax payments must be up to date, or an Offer-in-Compromise will be returned without processing. FAQ 2. Estimated tax payments must equal either 100 percent of your total tax from the prior tax year, or 90 percent of the income tax you expect to owe for the current year. Divide the total by 4 to get your quarterly payment amounts. See Publication #505, Tax Withholding and Estimated Tax.
A Maserati is a Reasonable Expense, Right?
- your daughter’s private school tuition
- public or private college expenses
- retirement contributions to your 401(k)
- your season tickets for the NY Giants
- payments on unsecured debts such as credit card bills
- paying off the loan your father-in-law gave you
- your family’s Disney vacation
Collateral Agreements for Entrepreneurs, Executives and Other High Earners
- If the IRS believes your current income in not at its full potential (e.g., you used to make more money than you do now and the IRS is concerned you will again make more money after they accept an offer), the IRS may require a "collateral agreement" to mitigate that risk, e.g., if your current income is $20,000, the IRS might demand 10% of income in excess of $28,000, 15% of income in excess of $35,000, etc. (these numbers are made up for an example and your schedule would depend on IRS discretion). Thus, the IRS shares any increase in income, but never more than the tax previously owed, including ongoing interest.
- The IRS does not like collateral agreements and generally counter-offers to accept an increased offer amount without requiring a collateral agreement. It becomes an economic decision whether to accept the increased amount or lower amount with a collateral agreement.
- Do you think your income will increase sufficiently so that paying the increased offer amount is better than the collateral agreement ?
- Do you just want definite closure ?
- Have you have already offered as much as you can pay, and thus can not increase the offer ?
- Another type of collateral agreement comes into play if more than 1 taxpayer is liable for the tax and not all of the liable taxpayers are participating in the offer, e.g., ex-spouses on joint income tax returns or other persons liable for trust fund recovery penalties. Only the taxpayer making the offer is relieved of liability.
- The IRS will never collect more than the full balance of tax owed from all persons liable.
Under Treas. Reg. § 301.7122-1(b), the circumstances in which the IRS may accept less than the full liability include:
- Doubt as to Collectibility
- Doubt as to Liability
- Promote Effective Tax Administration or Extraordinary Circumstances
Chances of Success for OICs
- The approval rate is currently about 40%.
Part 3: OICs and Collections
- Collection Suspension: The IRS may not levy a taxpayer's property if an offer is pending (has been accepted for processing), or for 30 days after a rejection and while an appeal of the rejection is pending. The date of levy suspension begins when the IRS officially signs for and accepts the offer for processing.
- CSED Extension: For the 6-12 months (possibly longer) the IRS takes to review your Offer-in-Compromise and while collection activity is suspended, the 10-year Statute of Limitations (Collection Statute Expiration Date) is tolled and extended.How Long is the Statute Tolled For?
How Long is the Statute Tolled For?
- The OIC is pending on the date an authorized IRS employee determines the offer is ready for processing until the IRS accepts, rejects, returns or acknowledges withdrawal of the offer in writing, and, if a taxpayer requests an Appeals hearing for a rejected offer, until the Appeals office issues a determination in writing to accept or reject the offer.
All OICs Are Not Created Equal: Complications
- Self Employment – If you have Self Employment income the IRS transfers your Offer to a different area that always takes longer. They look at the case more in depth and also want to make sure you are not mixing business and personal expenses.
- High Balance – Offers In Compromise with balances over $25,000 usually take much longer to process. Offers with over $100,000 balances take even longer.
- Complex Circumstances – If you have loans all over the place, multiple vehicles, or a bunch of random deposits that need explaining, your Offer is going to take longer than normal.
- Initial Rejection – If your Offer is initially rejected, adding an appeal in there could add another six (6) months to the process.