IRS Law Blog

I always try to teach my kids the difference between needs and wants.

You need to eat dinner; you want to eat at Chipotle.

The same applies to an IRS offer in compromise.

You need to keep the IRS out of your affairs, and live free from levies and seizures of your property.  You need peace from the IRS.

But you have seen TV and radio advertisements for the IRS offer in compromise program, and may want to settle and no longer have a tax debt.  You want what you’ve been sold and told – that an offer in compromise is simple, easy, and everyone qualifies.

The hard truth is that an offer in compromise is often not necessary, and everyone does not qualify.  There other less intrusive – and less costly – ways to handle an IRS problem.  And that could be all you need.

Before you jump into an offer in compromise, consider the following:

• Your age and dependents.  You may be at a point in life where you can live with owing the IRS, but simply want to ensure that they stay out of your affairs – no levies on your wages, social security, or your other property.  Quiet is good.  The IRS has a program for this – it is called currently uncollectible, and it keeps the IRS out of your life.  If you are granted currently uncollectible status, the IRS will agree to not force you to make any payments, and will not take any action to collect against you (even though you will still owe them). The result is the same as in offer in compromise:  the IRS is effectively out of your life and will leave you alone.  You can live with owing the IRS; you cannot live with them bothering you.  And you do not need an offer in compromise to accomplish that – currently uncollectible is a simpler and less time-consuming process.

• Need for release of tax lien.  A benefit of the offer in compromise is that acceptance will result in the IRS releasing all Federal tax liens against you. The release of the lien could improve your credit, and give you back equity in your house.  It could also allow you to purchase a house.  But do you really need the benefits of a tax lien release?  Do you need to improve your credit, or purchase property?  Do you have minimal assets anyway, so that the tax lien is of no real value to the IRS?  Also, an IRS tax lien is usually good for only 10 years, and your tax debt may be old enough that the liens will soon expire anyway, without a compromise.

• Future increase in income.  Do you anticipate your income increasing?  If so, now could be a good time to consider an offer in compromise.  More income could have a negative impact on your compromise, raising the settlement value or even resulting in rejection.  But if your income is steady, the need to settle may not be as urgent.  With steady income, you may qualify for an IRS installment agreement.  The nice part about installment agreements is that they do not have to result in full payment to the IRS.  By law, the IRS has to give you the payment plan you can afford, after application of their internal budget guidelines.  You can owe $100,000 and pay $100/month.  As the IRS has 10 years to collect from you, the most you would pay over a full ten years at $100/month is $12,000.  That’s settling $100,000 for $12,000, all without an offer in compromise.

• IRS collection statute expiration date.  IRS tax debts come to an end, and that should include yours.  An offer in compromise is not the only way to do away with the IRS. Time puts an end to tax problems.  From the date you first owed the IRS, they have 10 years to collect from you.  Consider this:  An offer in compromise can take 12 months to investigate, after which the IRS will give you 24 months to pay the settlement.  That’s a total of 36 months until an offer in compromise is completed and you have a fresh start.  But if the IRS only has three years left to collect, an offer in compromise would not necessarily get you out of tax debt any sooner than letting the clock tick.

An offer in compromise is not a simple process.  The IRS has very specific guidelines to determine if settlement should be approved.  Those guidelines include imposing budget restrictions on your living expenses, which can create an ability to pay (according to the IRS) that is different from your reality.  The end result is often offer in compromise rejection.

Also, bear in mind that that IRS rejects about 60% of the offers it receives.  With that in mind, before jumping in with an offer in compromise, it is important to understand if it is necessary – do you need to settle or want to? – and what better options exist to accomplish your goals.