An offer in compromise is certainly appealing – forgiveness of your tax debt, tax liens released, freedom to use bank accounts and earn wages – all without looking over your shoulder for the IRS.
But an offer in compromise is not a quick fix.
This is about what they don’t tell you on those it-sounds-too-good-to-be true TV and radio ads.
Let’s illustrate with an example of how the IRS offer in compromise really works.
We will start with an OIC submitted at the beginning of a year, and do a month by month walk-through of the path that your offer will likely take:
Year 1 of the OIC:
January: You file your offer in compromise.
June: If you are lucky, your offer in compromise is assigned to an IRS OIC specialist for investigation within six months of submission.
August: After the OIC specialist gets your offer in her inventory, you will receive a letter with a list of documents to provided, usually consisting of bank statements, recent paystubs, letters from your bank confirming your auto and mortgage loans, and verification of living expenses like health insurance, life insurance, utility bills and child support.
September: As requested, you send in the requested documentation to the offer investigator.
October: The offer investigator completes a review of your offer, and has three options: reject, counteroffer or accept your offer.
Let’s presume that you received either an outright rejection, or a counteroffer at a higher number, which is the most common outcome at this level of investigation.
Either way, your offer is not being accepted, and you disagree with that. You have 30 days to file an appeal stating your disagreement, and to request a conference with an IRS appeals officer.
November: You file your appeal stating your disagreement with the proposed rejection or counteroffer the IRS made to you.
Year 2 of the OIC:
March: IRS Office of Appeals is ready to hear your appeal, and sends you a letter stating a date and time for the appeals conference. You have the right to send in any additional or new information in advance of the appeals conference.
April: You have your appeals hearing, the IRS appeals officer agrees with you, and you reach agreement to a settlement amount.
June: The IRS appeals officer needs to get approval of the settlement from IRS attorneys. He gets the approval, and in June, Year 2, the IRS appeals sends you official notification that the settlement has been approved and your offer has been accepted.
Congratulations. 18 months later you have an accepted offer in compromise. But you are still not done yet.
You have to pay the settlement to the IRS.
The IRS will give you terms on making the payment.
The IRS will allow you to either pay within five months of notice of acceptance. If you cannot do that, the IRS will allow 24 months. But, in most cases, the 24 month option usually results in the IRS charging you more in the settlement than the quicker five months.
Here is where the payment part of the offer process will leave you:
November, Year 2. If you chose the five month option, it will November, Year 2 until the offer is complete (five months from the your offer acceptance letter in June).
June, Year 4. Yes, we are really jumping forward here. If you chose the 24 month payment option, it will be June, Year 4, until you get your fresh start from the IRS (24 months from the offer acceptance letter in June, Year 2).
One last matter of the fine print on an OIC: All offers in compromise include a five year probationary period to remain current on the filing and payment of all taxes after offer acceptance. If you default on future tax obligations, the offer could default, too, and all the taxes will come roaring back.
These timelines vary and are dependent on the IRS workflow at any given time. I have seen offers take more than one year to get to the initial investigation stage. Rarely will they get there within six months after submission.
Most every offer should go into Year 2 to be investigated, accepted and paid.
Also, bear in mind that the IRS has 10 years to collect a debt; after that, the IRS is barred by law from doing so. And an offer in compromise, while it is pending, stops the clock from ticking.
Sometimes, it is better to hold tight than submit an OIC, especially if three years or less are left on the time the IRS to collect from you.
With an offer in compromise, it is important to look before you leap and make sure that jumping in is indeed the best course of action.