Offer in compromise: Think twice if the statute of limitations is almost up.
I often have clients who are very focused on an offer in compromise. But before we plunge in, the first thing I do is check on how much longer the IRS has to collect the tax.
Here is why:
1. An offer in compromise extends the timeframe the IRS has to collect by amount of time it is pending. The submission of an offer in compromise stops the IRS collection process, and you give that time back if it is rejected. The IRS has ten years to collect unpaid taxes.
2. Offers in compromise can take a minimum of six to nine months for investigation. If the initial investigation results in a rejection or a result you disagree with, you have the right to file an appeal and have the IRS findings reviewed. Many offers in compromise are rejected at the outset and require appeals for resolution. This appeal process to take another six to nine months. That is a total of anywhere between six to eighteen months from the time of offer submission to acceptance.
3. If the offer in compromise is ultimately accepted, consider how quick you can pay in the agreed upon value of the settlement. The IRS will give you up to two years to pay the settlement amount after acceptance. The offer is not completed until the final payment is made. Also consider that a compromise entails a five year probationary period to remain current on all filings and payments.
4. If the offer is ultimately rejected or valued at a number that is more than what you can say “yes” to, you have lost very precious time and are back where you started.
Compare the pros and cons of #1 – #4 to the amount of time the IRS has remaining to collect the tax when the offer is about to be submitted. Even if the offer is accepted, it is very possible that the time you spent getting there would have put you at “game over” by expiration of the statute of limitations on collection.
It is always important to compare timing elements. I have seen too many clients come to me after submitting a bad offer who would have been done with the IRS if they held back and considered all strategies (uncollectible, bankruptcy, letting sleeping dogs lie). I am all for an offer in compromise – it is a program that works in the right scenario – but other options may be better on a risk/reward basis. If there are two to three years left on the IRS statute of limitations on collection, think hard before submitting an offer in compromise.