Alright, here’s the rub. An offer in compromise can be an incredible tool for settling a tax debt with the IRS. While in recent years tax promoters like American Tax Relief, JK Harris, Taxmasters, and Roni Deutch have been driven out of business for their inability to live up to their promises. Not only that, but with new promoters opening up shop all the time, it’s easy to write the entire program off. But, whatever you do, keep your chin up! In reality, the offer in compromise program can be a fantastic way to put a tax debt behind you permanently.
However, and this is key, the IRS is not stupid. It’s better to get rid of any ideas that they’re going to let you get away with whatever you want. The truth is that they aren’t going to settle for a lessened collection because you asked nicely or hired a tax attorney or tax resolution company to do the asking for you; no matter what anyone tells you, there is no magic wand. The IRS will only accept an offer if it’s in their best interests. That’s the job of a proper tax professional — to convince the IRS that the amount you offered is in their best interests!
With that said, I want to share four circumstances that I wouldn’t advise taxpayers to file an offer. I’ve seen these four cause a lot of problems, and I would encourage anyone in a similar situation to think twice before submitting an offer.
1. When you have old liabilities and you’re considering filing bankruptcy
Would you believe that you can file Chapter 7 bankruptcy to eliminate old personal tax liabilities? An offer in compromise requires you to pay the IRS a minimum of something. So, why would you bother paying the IRS anything when you can walk away without paying a cent?
My firm doesn’t file bankruptcy, so we don’t have a dog in this particular fight. We just want to see people get the best possible resolution, and there’s quite a few cases where bankruptcy can be the best financial option.
So if you’ve been considering bankruptcy anyway and you owe money to the IRS, it may be a good idea to talk with a bankruptcy attorney in your area who specializing is discharging tax debts. We’re more than happy — if we think bankruptcy is the best option for you — to help you find a bankruptcy attorney 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 five 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 our clients who have a hard time being in compliance — done by filing on time and paying the correct estimated taxes — we recommend choosing another course of action to settle their tax debts.
3. If you have filed previous offers and had them rejected
The last thing the IRS wants to see is repetitive offers being filed only to have them rejected one after another. That shows a lack of good faith and indicates that you’re trying to take advantage of the program to further your own financial gain. The simple truth is, if your offer isn’t competitive, then it will be rejected. That rejection will impact how the IRS looks at later offers you might file. This is why it’s terribly important to make sure that the offers you are filing are reasonable and have a strong chance of being accepted. It’s better to aim well once and hit the target instead of throwing darts willy-nilly and hoping one of them hits the bullseye.
I’ll be straight-forward, a lot of people think they can file an offer in compromise. They believe it is just filling out a bunch of paperwork and then having the IRS give it the stamp of approval. While there is a significant amount of paperwork involved, a successful offer in compromise tells 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 to get you the best possible resolution. Fail to do this and your offer in compromise will be rejected or will be accepted and put your on the hook to pay far 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.