BY: MICHELLE D. WYNN, ESQ.
Reviewing Offer in Compromise Calculators
As Tax Resolution Professionals in the modern age, we routinely receive advertisements for different software products to “help” us in our representation of our clients. One of the more recent software products we have been contacted about is an Offer In Compromise Calculator. Just a quick Google or Bing search will turn up tons of free calculators that people can use to determine whether they qualify for an Offer In Compromise and what the “right” Offer amount. These calculators fail for reasons I will discuss below.
The ubiquitous Offer in Compromise
It is no surprise to me that there is such an abundance of these tools available online. The Offer in Compromise is the most well know tool of tax resolution – thanks to all of those lovely television ads that scream “We can settle your IRS debt for pennies on the dollar” or “We can save you 40% off your tax bill.” In fact, an Offer in Compromise can be an amazing way to get past your old tax problems and start your tax life over with a pretty clean slate – if you qualify and if you can afford your Offer. Unfortunately, not everyone qualifies and not everyone can afford Offer amount that the IRS would accept.
So, should you use these Offer in Compromise Calculators?
Let’s start with the free versions meant for taxpayers (BTW — they all look like sales tools — not that there’s anything wrong with that). I’ve toured several of these when writing this blog. Many of them are based on the same basic format and ask the same questions.
They ask you for your bank account, investment account, and retirement account balances. Good. You will need this information if you want to apply for an Offer in Compromise using Form 656. What these tools leave out is that your bank accounts, retirement accounts, and investment accounts do not get counted dollar-for-dollar into your Offer amount. There are calculations specific to the investment type to determine the value to include in your Offer.
They ask you for the quick sale value of your assets. This is an essential part of computing an Offer amount, but how many people know what assets to include or how to determine the quick sale value of their assets? Or which assets have exclusion against them so that they don’t have to be included? Determining asset value is an essential service that an average taxpayer would have trouble making an optimal value that can be legally and factually supported.
They then ask: What is the total amount of all secured loans (the IRS will not consider unsecured loans)? This question is both too specific and too vague. (amazing, isn’t it?) Here’s a normal scenario for my clients: They have a house that has 2 mortgages on it totaling $500,000. Quick sale value on the house is $200,000. They also own 4 nice cars, worth $10,000 each, all paid off. The calculator tells them they have no equity in assets that the IRS will consider. However, if you told that to an IRS Offer Examiner (the people who evaluate your Offer), they would laugh in your face (or at least behind your back). They would tell you that the value of the assets that will be calculated in your Offer is $25,100 based on the equity in your cars.
They then ask for your monthly income. This seems simple enough, right? Suppose the pay that gets deposited into your bank account every week is $553.27. Your monthly income must be $2,379.06. WRONG!! Your monthly income is actually your weekly gross income without taking into account any deductions then multiplied by 4.3 (and if you receive yearly bonuses or other sporadic income, it gets more complicated). No one ever thinks of their monthly income this way (unless you work with the IRS every day) and these calculators don’t tell you this.
They then ask to input your monthly expenses. Actually, they ask for your “average monthly allowable expenses.” Now, if you knew the time frames to consider in determining your “average” expenses, and the allowable amounts and allowable types of these expenses, you wouldn’t need this calculator. So, if you are using this calculator, you are probably going to get it wrong.
One of the more obnoxious aspects of these calculators is that they create the impression that Offers are simply about plugging numbers in. Here is some important facts: It is completely up to the IRS whether or not to accept your Offer in Compromise. If they don’t like you or think you are not a nice person, or did something dishonorable, they can reject your Offer even though your numbers 100% justify what you are willing to pay. It is up to you or your tax resolution professional to persuade an Offer Examination Agent that you worthy of an Offer. Remember, there is no right guaranteed to pay less taxes than you owe in the Constitution.
Now, let’s move on to the “Tax Professional” Paid Versions Offer in Compromise Calculators.
These are much more comprehensive programs. However, they still have several major issues:
They treat Offers as if they are just about plugging in numbers and coming up with some “correct” answer. Yes, there are rules to follow in computing an Offer. Some of these are hard rules that cannot be messed with. Most of them, however, are guidelines. A program that treats these guidelines as etched in stone will actually discourage someone from digging deeper to find out whether their client requires different treatment.
We have several clients that these programs would not even calculate an Offer amount for! These programs would have given a wrong answer. Claiming that the client did not qualify, when extenuating circumstances (properly documented) indicate that an Offer is appropriate and we have been successful in having such Offers accepted. Lets take, for instance, a client who makes enough to fully pay off his liability within 6 years in an Installment Agreement. However, he is retiring next year and will not be able to afford any payments once he only receiving Social Security and he has no assets with equity to be considered. He actually would qualify for an Offer but the program would tell you he doesn’t. And these programs can’t tell you how to legitimately plan to get an offer more likely to be accepted.
These programs cannot calculate Offers for businesses that are currently running. Businesses are very complex animals, no matter how simple the business plan or type. And sometimes all payroll tax deposits aren’t made and huge tax debts are incurred. Well, an Offer in Compromise can lower the amount owed and even create a more favorable repayment schedule. Incomes fluctuate from month to month and year to year. Expenses increase every year, but income doesn’t always keep up. It takes a trained eye to look at the financials of a business over different time spans, determine the right time span to use in building a case, and to determine when historical numbers are not appropriate to apply into the future. To make things even more complicated, you then have to explain your rationale on these different positions to an IRS Offer Examiner who likely had never seen a Profit and Loss statement before starting with the IRS and, almost universally, has never operated his or her own business. Offer in Compromise is a valuable tool for a business trying to repay unpaid trust fund taxes. These programs imply that such an incredible solution is not possible.
These programs will not tell you if an Offer is not the best way to resolve your tax problem. For some people, even if they qualify for a very low Offer, their situation may mean that Currently Not Collectible status (where the IRS accepts that you cannot afford to make any payments towards your tax liability at this time) or Bankruptcy may be the best option. Many people want an Offer, but sometimes just cannot afford to come up with even $1,000 to be able to pay their Offer amount. Especially if a medical issue (or natural disaster) strikes in the middle of the resolution process.
These programs do not discuss the most optimal way to structure payments. There is a much better way to do it. I won’t discuss it here as it is dangerous information for someone who is not competent at tax resolution.
I don’t like making enemies and don’t wish to diminish someone’s hard work that they put into developing software that I never could. Yet I feel as if I must speak up — many people will be led down the wrong path by following these calculators. These calculators are not suitable for either self-help or for true tax professionals. While they can give a rough guideline, they also can lead to the exact wrong answer. I could see the professional version as a good training tool. As long as the lesson was DO NOT RELY ON OFFER IN COMPROMISE CALCULATORS.
My advice : ask your tax professional is they use a Offer in Compromise calculator. If they say yes, there is a good reason: they do not possess the creativity, aptitude, experience, and wisdom to find the tax solution that will be best for your future.