IRS Law Blog

There are many pros and cons to deciding whether an offer in compromise is the right next-step in resolving your IRS debt.

One thing is for sure:  An OIC is not a one-size-fits-all affair.  There are many factors to think about before attempting to settle with the IRS.

It can put a smile on your face and have you jumping for joy (the IRS said yes and your tax debts are over!).

Or, like the IRS in general, an OIC can leave you a little frustrated as it requires an understanding of how to navigate though IRS settlement guidelines that often have no fairness or reason.

What you want, though, is to know what to expect, and to make a fully informed decision about whether the IRS compromise process is right for you.

Here, then, are the good, the bad, and the ugly of offers in compromise:

The good:

• An OIC can be as advertised – a fresh start from your IRS debt.
• No more looking over your shoulder with fear of an IRS seizure of your wages or bank accounts.
• Improved credit score – after an offer in compromise is complete, the IRS will release all tax liens filed against you.
• IRS collections are put on hold while the compromise is investigated. After acceptance, you will have peace from IRS certified mail letters, visits from IRS Revenue Officers and wondering what’s around the corner.
• You have put the IRS behind you and can buy a house, a car, and save for retirement.

The bad:

• The IRS will do a comprehensive investigation of your finances before settling, requiring completion of their Form 433A or 433B to disclose your income, expenses and assets.
• You will have to tell the IRS where you work and bank, and list your assets, including your house, cars, valuables and retirement accounts.
• Verification will be required, including an IRS review of your paystubs, tax returns, bank statements, business profit and loss, and proof of payment of your monthly bills.
• While an offer in compromise is being investigated, the IRS clock to collect from you (10 years), stops running. In that regard, it can be a bad idea to try to settle when only a few years remaining for the IRS to collect.
• After acceptance, the IRS will put you on a five year probation, requiring full compliance in filing and payment of all taxes.  Not performing to IRS expectations going forward will default the settlement.

The ugly:

• An OIC is not a quick fix – an offer in compromise can take the IRS a minimum of 9-12 months to investigate, with another 6 months if appeal is needed; the IRS then allows 5-24 months to pay the settlement.
• The IRS has guidelines that can impose their will over yours on budgeting matters. Making credit card payments, or have a high monthly mortgage or car loan?  Forget it, the IRS may want that money in their settlement calculations.
• If the IRS determines they can collect the amount you owe, your offer will be rejected (with appeal rights).
• The IRS does not have an open door policy on offers.  It is not a handshake deal – the settlement amount is not based on fairness but collectibility of the debt.
• The IRS most recently rejected 60% of the offers it received, consisting of 41,000 rejections out of 68,000 submissions.  Funny how the TV ads don’t mention that.

It is easy to be lead to believe how simple it all is.  And make no mistake, an offer in compromise can be a wonderful way to rid yourself for good of the IRS.  But you need to know the bad and the ugly to make sure that an OIC is the right move for you.

And keep in mind that there are other options – a compromise is not the only way to clear the IRS out of your life.  The IRS can agree that you owe the debt but not force you to repay it (known as currently uncollectible, where the IRS puts you in their bad debt category and leave you alone).  The IRS has 10 years to collect taxes – maybe you let the timeframe expire rather than compromising.  Bankruptcy can also eliminate taxes.

Hopefully, knowing about all aspects of an IRS compromise as well as your other options can help you make the right decision to move forward in way that is in your best interest.