When do I know it’s right to file an offer in compromise? 5 top reasons.
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?