Turn on your television, listen to the radio, and it will be there: advertisements encouraging you to settle up with the IRS. Or watch the media, and you will see government agencies getting coverage for cracking down and closing some “pennies on the dollar” promoters for, well, over promoting the offer in compromise.
Before jumping in with an offer in compromise, consider the following realities:
1. The IRS does NOT have an open door policy to settlements. Year in and year out, the IRS publishes its offer acceptance rate. On average, the IRS accepts about 25% of the compromises it gets.
2. An offer in compromise is NOT a “pick up the phone and make an offer” type of thing. An offer in compromise entails a detailed written disclosure of your finances to the IRS – where you bank, work, your monthly living expenses and the value of your assets. If your offer is rejected (and remember, many are),, you have just spilled the beans.
3. The IRS likes documentation to support an offer, meaning they will want you to provide bank statements, paystubs, verification of car and mortgage payments and proof of your living expenses, just to name a few. Sometimes, they will ask for this information more than once, depending on how long your offer takes to investigate. And things can happen in between the disclosures, like receiving a pay increase, which could negatively impact your settlement.
4. The IRS will likely disagree with the amount of your living expenses. They review your expenses to figure out how much cash flow you should have to repay your taxes. Notice I said cash flow that you should have, not actually have. The IRS has their own version of what you should be spending – known as “standard allowances” – and when they apply it to your actual expenses, the result is “phantom” cash flow that raises your settlement value and usually forms the basis of offer rejection.
5. An offer in compromise is not a quick fix. On average, the IRS takes 6 to 12 months to investigate a compromise. If the initial investigation results in a rejection, you have the right of further review in IRS appeals. Presume you will end up in appeals, and add another 6-9 months. Total expected time for a compromise: 12 – 18 months.
6. If your compromise is accepted, you need to pay the IRS the settlement value. If you do not have the cash readily available, the IRS will give you up to 2 years to make payments. Add that to the time it takes for the offer to be investigated to get to final resolution.
7. Here is a biggie: Submitting an offer in compromise extends the timeframe the IRS has to collect from you. This is known as the statute of limitations on collection, and lasts for 10 years. If you spend 18 months trying to get an offer accepted, and are unsuccessful, you will come out of the offer process having given the IRS another 18 months of your life because the collection timeframe was tolled. This is especially disheartening if you only had a short time left on the statute of limitations on collection when you sent in the offer, because you could have been done with the IRS on time but for the offer.
With all that said, the offer in compromise process is real and can work in the right situation. But careful consideration of whether your situation is right for an offer should always be undertaken before jumping in, with the knowledge that a compromise is not the always the best way out.