Our tip: 4 Times Not to File an Offer in Compromise
The Offer is Compromise is truly a great tax debt settlement program of the IRS. Sure in recent years, many tax promoters such as American Tax Relief, JK Harris, Taxmasters and Roni Deutch have been driven out of business for their inability to match up their promises with results, and new ones spring up on the internet all the time, but don’t let that discourage you. The Offer in Compromise program is a fantastic way to a a tax debt behind you permanently.
However, — is the IRS is not stupid. They aren’t going to settle for less simply because you asked them to or hired a tax attorney or tax resolution company. to negotiate for you. There is not magic wand. The IRS will only accept an Offer in Compromise if it’s in their best interest. And that’s the job of your tax professional — to convince the IRS that the amount you offered is in the best interest of the IRS!
With that said, this is my opinion on 4 circumstances where it is not in your best interest to file an Offer in Compromise.
1. When you have old taxes and you were thinking about filing bankruptcy.
Would you believe that you can file Chapter 7 bankruptcy to completely wipe-out old personal tax liabilities? So why bother paying even a cent to the IRS is you can walk away without paying anything?
My firm doesn’t file bankruptcy, and so we don’t have a dog in the fight, except that we just want to see people get the best resolution for them possible, even if that means there is no fee for us.
So if you are thinking about bankruptcy anyway and you owe money to the IRS, then it may really be a good idea to talk with a bankruptcy attorney in your area who specializing is discharging tax debts. Email us at firstname.lastname@example.org if you need a name of someone in your area.
2. If you have never been in compliance and never will be.
One of the lesser known aspects of an Offer in Compromise, is that in order to be ‘permanently’ accepted, the taxpayer must remain in complete compliance with the tax code for a period of 5 years after the offer was accepted. Failure to do so, by not filing returns or running up a new liability, means that the offer is undone, and the complete amount that was settled comes back into action.
So for many of our clients, who have a hard time being in compliance by filing on time and paying correct estimated taxes, we recommend another course of action to settle tax debts.
3. If you have filed previous Offers in Compromises and failed.
The last thing the IRS wants to see is repetitive offer in compromise filed and rejected. That shows a lack of good faith. And the truth is, if your offer isn’t competitive, then it will be rejected. That rejection will impact how the IRS looks at a later Offer in Compromise you filed.
I’ll be honest. A lot of people think they can file an offer in compromise. They believe it is just filing a bunch of paperwork. And while there is a lot of paperwork involved, a successful Offer in Compromise is a story, a factual story that convinces an IRS employee that they should take the settlement you propose (Read more about that here). It’s got to be based in reality, but it also must take advantage of little-known rules and exceptions. Fail to do this and your Offer in Compromise will be rejected…or you will wind up paying too much.
Finding the best tax debt settlement is more than just filling out IRS paperwork and crossing your fingers, hoping for the best.
Anyway, we see a lot of Offers in Compromises others have filed. If an Offer has been filed and doesn’t stand a chance of being accepted, we will withdraw it, and reevaluate the best options.
Also, when you file an offer in Compromise, you ‘toll’ the statute of limitations. What this means is that the IRS only has a certain amount of time to collect on an IRS debt. The time period is 10 years from the date the tax was imposed, assuming nothing ‘stopped’ the ‘statute’ from ‘running.’ For instance, for tax year 2002, let suppose a tax return was timely filed. So the taxes was assessed on April 15, 2003 and there was an unpaid balance. That means if nothing happened to toll the statute, the IRS’ ability to collect on the debt would no longer be in existence on April 16, 2013. That’s right — the tax debt vanished.
But by filing offers in compromise, the clock stops running. Here’s an example — an attorney I represented filed 6 offers in compromises for his 2002 taxes. And because each offer in compromise was in process for around a year, the IRS still has until 2018 to collect on the debt. If he didn’t waste his time with an offer in compromise, he would be nearly done with the problem.
And now, when he files a realistic offer in compromise, the IRS will have a hard time taking it seriously. And the collection period will be extended to 2019.
4. When the Statute of Limitations is in your favor
Now let us suppose that the attorney I mentioned above filed his 2002 1040 on time on April 15, 2003. And that he has done nothing to ‘toll’ the statute is running. And now, with penalties and interest, he owes around $250,000. He comes into our office today — September 25, 2012 and wants to settle his taxes for $20,000. And his offer in compromise collection information supports such a settlement agreement. Should he file such an offer?
Well, maybe not. Look, the IRS has less than 7 months to collect on his debt. Maybe this attorney would be better off by getting the IRS to accept a partial payment installment agreement for $1000 a month for the next 7 months rather than an offer in Compromise. Why? because once April 16, 2013 comes, that’s it. It’s over. He only paid back $7000 of a $250,000 debt. And he doesn’t have to worry about the 5-year look back period I mentioned above.
The downside to this strategy is that any tax lien filed against him can not be released or withdrawn. While the tax lien would be of no affect after the collection period expires, it still would appear as a debt on his credit report that went unpaid…essentially a write-off. Whereas an accepted offer in compromise that pays off an tax debt is treated as payment in full for credit reporting purposes.