When do I know its right to file an offer in compromise? 5 top reasons. Part I of II.

Posted on June 21, 2008
Filed Under Offer in compromise |

1.     You are pretty much broke.   In a compromise, the IRS must be convinced that they will be unable to collect the amount of money you them in the timeframe they have to do it (10 years).  Every $100 that the IRS determines you can pay them results in $6,000 compromise value (i.e., if you can pay the IRS $200 per month, then the value of your cash flow in a compromise is $12,000).

2.     You have minimal equity in assets.    If the IRS took your assets, and paid off any loans against those assets, what would be left to be applied to your tax debt?  The IRS usually reduces the valuation of cars and real estate by 20% in a compromise.  Most of your personal household goods will be considered out of reach by the IRS.  Add in the value of retirement plans, less taxes to liquidate.  So, what is left?

Note:  You can submit an offer in compromise if you are not “broke” and if you do have equity in assets; it just increases the value of the compromise.

3.     You have considered how long an offer in compromise can take.   Figure six months to a year for the IRS to complete an initial investigation of the compromise.  If the IRS is unwilling to accept the amount offered, you then have the right to then file an administrative appeal stating your disagreement with the initial findings.  Figure another six months to a year for the appeal.  If you can reach an agreement with appeals, the IRS will allow you to pay the settlement over up to two years. It is not until the final payment is made that your offer is considered complete.

4.    You have considered the timeframe the IRS has left to collect the tax.   The IRS has ten years to collect a tax liability.  Submitting an offer in compromise extends the collection timeframe.  For example, if a compromise is unsuccessful after a two year investigation, those two years are added back into the timeframe the IRS has to collect.  Careful consideration should be given to whether it is advantageous to submit an offer if the IRS is running out of time to collect. Be careful that the offer sends you forward to resolution, not back in time.  

5.    You have considered other options.  Bankruptcy can eliminate taxes, and requires no negotiation with the IRS.  A Chapter 7 bankruptcy can be completed in six months.  The IRS also has a program known as “uncollectible,” where they write-off debts that cannot be collected.  If the collection timeframe is ticking, what is the best way to run it out?  An installment agreement?  Uncollectible? What is the best option under the circumstances?

Comments

2 Responses to “When do I know its right to file an offer in compromise? 5 top reasons. Part I of II.”

  1. John M. Stanley, EA on August 29th, 2008 9:39 pm

    Currently have 2 clients who owe big. Neither have the assets to pay the full amount owed. Both want to do an offer under the “uncollectable” umbrella. T/P A owes almost $90,000 & has the ability for an offer of $30,000. He’s 62 and in poor health & his spouse has been in/out hospitals all year. Both are self-employed. T/P B owes about $65,000; t/p unemployed & owns nothing;spouse makes $80-95K/year & owns the house, but mortgage is greater than value. I know this is brief - any ideas? I’ve done several offers in the past w/clients who had nothing and won decisions for the client in the past, but I’m on the fence with both of these folks & can’t really figure out why. Both offers will go to Memphis. Thanks for any assistance. Also, Revenue Officer very aggressive with client w/good income. John M. Stanley, EA.

  2. howardlevy on August 30th, 2008 10:36 am

    John:

    You are on the fence for good reason. I would think very hard before submitting the offers. The IRS is accepting about 20% of offers these days. They accepted about 11,000 in 2007, down from 47,000 in 2001. Wow.

    For Taxpayer A, how are you proposing to pay the $30,000? Sounds like this is equity in some asset? If the offer is to be paid in a lump sum, then 20% must be paid upfront to the IRS, This is NONREFUNDABLE if the offer is rejected. Does not sound like they have access to cash like that - the offer must make a whole lot of sense to invest $6,000 with no guarantees. If you are proposing payments of the offer value over 24 months, then you can be going as long as four years until you are done (1-2 years for offer investigations, and 2 years for payment). And do they have cash flow to repay $30,000 over 24 months?

    The only benefit to an offer over uncollectible for someone older and in poor health is that any Federal tax liens will be released when the offer is accepted and paid. Otherwise, if they are uncollectible, what difference does it make to live under it without the IRS pursuing collection? The only issue would be the equity (if that is the source of the offer), but it is unlikely that asset seizures would be made on older and poor health taxpayers who are current on taxes and cannot borrow out the equity.

    A compromise is great for someone who wants to move forward with family, business, jobs. WHAT WILL YOUR CLIENT GAIN V. UNCOLLECTIBLE, CONSIDERING THE RATES OF COMPROMISE ACCEPTANCE, TIME IT TAKES FOR RESOLUTION, AND THE NONREFUNDABLE UPFRONT INVESTMENT? Consider the statute of limitations in this equation as well.

    As to Taxpayer B, an income of $80-95k for two people will likely eliminate an offer in compromise. The IRS standard expense allowances will probably result in cash flow that makes the value of the offer excessive and/or impractical. I assume this is a joint liability - a separate offer for unemployed taxpayer would not accomplish much as the source of collection is the spouse. Your offer may eliminate the Revenue Officer for now, but then what?
    We will have to think out of the box - what is the cost of doing an installment agreement for the time left on the collection statute. Bankruptcy may work when offers do not - it is really one of the best ways to get around the tightening of the offer program.

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