5 Reasons You Would NOT Want to File an Offer in Compromise.
The IRS Offer in Compromise program is a bit different than what you hear about on TV. It does exist, but it is not for everyone. An Offer in Compromise is an agreement between you and Federal Government to settle your back taxes for less than you owe. That being said, here are five reasons you would not want to file an OIC.
- Filed Bankruptcy
In some cases, filing bankruptcy is a better option over filing an Offer in Compromise. If you have old debt it may be more beneficial as your debt is totally wiped out and no further payments would be necessary, except for your Attorney. If you have already filed for bankruptcy the IRS cannot accept an Offer, period.
- The Statute of Limitations on your debt is about to expire
The Statute of Limitations is also called Collection Statute End Dates. These are dates are set when your tax return is filed, or when tax was assessed, and runs out 10 years later. This means, the IRS has 10 years to collect the tax. If they do not collect in that time frame, the debt is erased.
What does this mean? Well, if you filed a tax return on April 15, 2010 and had a balance due of $100,000. If the statutes were not tolled, such as filing a previous OIC, or filing bankruptcy, or appeals or litigations; this balance will run out on April 15, 2020.
Let’s say in 2018 you decided to file an Offer in Compromise as that $100,000 balance has now accrued eight years of penalties and interest. You were panicked and just wanted all this to be over and resolve your debt. If you were with our firm, we would advise you not to go forward with an Offer.
Why? An Installment Agreement would be a better option. For one, an Installment Agreement would only toll (extend) the State for 30-60 days. Whereas an Offer would toll the statute for at least one year, probably more. If the IRS would agree to an Installment Agreement for $500 per month, you would only end up paying 24 months totaling $12,000. Additionally, what if the Offer was rejected? You would be back at square one and with an additional one plus year on your statutes.
- Already file an Offer in Compromise that was rejected
If you have already filed an Offer that was rejected, it is difficult to change that outcome on another filed Offer. The only reason the outcome would be any different is if you filed years later and your financial circumstances had drastically changed. However, at that point, see #2 as your statutes are closer to expiring and an Offer may not be the best solution.
When you file an Offer. The IRS Offer Examiner notates all the documents you had submitted for review and a complete copy of your Offer is in the system for the entire Offer Unit to see if they had reason. So, you filed an Offer that was rejected. That Offer Examiner notates the reason for rejected and a calculator on why the Offer was rejected. It could have been for any number of reasons, such as failure to maintain compliance, missing information, frivolous submission, etc. Whatever the reason, it is in the system.
So, a couple years later you figure it is time to file another Offer. Have your financial circumstances changed? If not, probably not a good idea. They will review your previously filed tax returns to determine if your income has changed, along with all the other documents you have submitted. If you have dissipated assets since your last Offer, they will ask where the monies were dispersed to and why not to the IRS to pay your debt. As you can see, filing another Offer once one has already been rejected really opens the door to more than you may have bargained for. At this point, it is probably best to enter into an Installment Agreement and ride out the statutes.
- Have trouble maintaining compliance
Filing a successful Offer, or even being eligible, requires compliance. This includes filing returns timely, estimated tax payments, federal tax deposits, etc.
To file an Offer, you must ensure you have filed all required tax returns. If you file an Offer and a return is left unfiled, the IRS will immediately return your Offer. If your Offer is already on file and you fail to file a return, or file a return with a balance due and it’s not paid in full by April 15, the IRS will reject your Offer and will be up to you to submit an entirely new and different Offer. Along with submitting new application fee and 20% down payment.
To file an Offer, you must ensure you are up to date on all estimated tax payments. We typically suggest our clients to file monthly versus quarterly as it is easier to come up with the smaller amount each month versus a large amount every three months. In addition, it is easier to remember. If you file an Offer and are not up to date, the IRS will either request you get caught up within 14 days or return your Offer.
If you are filing an In-Business Offer, you must ensure you are up to date on all federal tax deposits. Again, if you are not the IRS will return your Offer.
If your Offer is accepted, you must remain in compliance for the next five years. Your case will be consistently watched by a Tax Examiner to ensure you are in compliance. If you fail to do so, your Offer will be rejected and all those balances due along with accrued penalties and interest will call come back to haunt you. From there, you are out of luck and most likely will not get another Offer approved.
- Equity in Assets
If you have assets with equity, you may not be eligible to file an Offer in Compromise. Reason being, it is not how much you owe the IRS but what is your Reasonable Collection Potential. Meaning, how much could the IRS expect to collect. So, if you have a large amount of equity in your assets, your collection potential is good.
For example, you own a home worth $300,000, but have owned the home for almost 20 years and purchased the home for $175,000. Right out of the gate you have $125,000 in equity leaving out the 20 years of payments. The IRS takes the Fair Market Value of $300,000 x 80% as if it were sold at auction: therefore, selling the home for $240,000. No, they will not sell your home, but they will ask you to apply for a home equity loan as you now have at least $65,000 in equity.
Another example is, you are 60 years of age and have a 401K worth $250,000. There are some calculations to this, but a general idea is you would take 20% for taxes, but there would not be a penalty as you are of age. Therefore, you could use $200,000 to pay down your IRS debt. The argument here would be you need this for your retirement, but unfortunately when you owe the IRS, retirement is not their concern.
Do you see a pattern here? It’s best to hire a firm who is experienced in working with the IRS and knows what to look for when determining if you are eligible for an Offer in Compromise. Not everyone is, so it is best to contact a tax resolution specialist you can trust.
Should you get help?
I have seen many people try to prepare their own OIC and fail because they do not fully understand the art of dealing with the IRS. Yes, you can submit an Offer in Compromise yourself but if you are trying to considerably reduce your debt, I recommend you rethink your position.
An “accepted” OIC is not the same as a “successful” OIC.
There is more to it. Sure, the average taxpayer can fill out the forms and after spending hours reading and rereading the instructions provide the substantiation needed for an application to be accepted. How do you measure success? To me, success is measured with an approval on the LOWEST DOLLAR AMOUNT the IRS will accept.
If you feel that you may be in over your head, or just want to get a second opinion, let’s set up a short call. To avoid the back and forth emails and phone tag, I have included a link to my Calendar https://calendly.com/taxman/tax-problem-resolution-initial-consultation. Let’s set up a 30 min. phone conference to get to know each other. The phone number to call is 855-829-5877 and my extension is 203.