Should you listen to advice to file an offer in compromise?
Time and time again, I hear from clients who received advice to file an offer in compromise from an IRS collection agent, their accountant, or a friend.
They took the advice and had their offer rejected by the IRS.
When should you be comfortable listening to advice from someone urging you to file an offer in compromise?
You need to make sure they know what they are talking about.
To begin with, an IRS collection agent – whether it is a Revenue Officer or Automated Collection Service (ACS) representative – is usually not qualified to give you offer in compromise advice.
IRS collection agents are not trained to investigate an offer in compromise. Their background is how to collect taxes from you, not how to compromise. They do not investigate offers in compromise and do not have a say in the decision to accept or reject them. IRS Revenue Officers and ACS representatives have nothing to do with your offer in compromise.
The only IRS agent trained to compromise your taxes is an offer in compromise investigator. It will be the offer in compromise investigator who decides whether your offer should be accepted, not a Revenue Officer or someone you spoke with at a 1-800 line at the IRS Automated Collection Service.
Why are IRS collection agents – without training in compromises and the decision-making authority – telling you to file one?
The agent may truly want the best outcome for you, and thinks you deserve the clean slate that comes with compromise acceptance. The advice may be guesswork, but made in good faith.
But other times, an IRS collection agent recommends a compromise to move your file off their desk.
Here’s what could be going through your IRS collection agent’s mind when recommending you file an offer in compromise:
- IRS is required by law to stop all collection enforcement action against you when your offer is filed.
- It can take the IRS over 12 months to investigate an offer in compromise.
- Your file will be in the hands of the IRS compromise investigator, not the collection agent, during this entire time.
Their intent may not be influenced by what is best for you, but rather by what is best for their work flow and case inventory.
Your accountant may be well-trained in accounting, but an offer in compromise is a different world. It is not about accounting rules, but IRS rules.
The IRS has a rule book, called the Internal Revenue Manual, with an entire section dedicated to the investigation of offers in compromise.
The Internal Revenue Manual’s rules on a compromise includes:
- Conditional and necessary living expense allowances that the IRS uses as oversight on your lifestyle and spending.
- Review and valuation of bank account balances.
- How to calculate the net realizable equity and reduce the value of your property.
- Documenting your wages, mortgages, car loans, student loans, and divorce obligations.
- How to calculate and reduce the equity in your house, car, and household belongings by using their quick sale value.
- Documentation and rules to value retirement accounts.
- Formulas to calculate your future earnings and ability to pay the IRS until their collection statute expires.
- Exemptions in your property that allow you to protect it from the IRS.
- Allocating shared expenses and a nonliable partner’s income so that person does not pay your IRS debt.
- Reducing the value of business assets.
The IRS rules, formulas and calculations are designed to make a compromise harder, not easier. Lack of familiarity can result in you paying the IRS more to settle than you should, or having your offer rejected.
And no one can advise you about filing an offer in compromise without taking a complete inventory of your assets, debts, earnings, and living expenses. The IRS needs your finances to apply their formulas and calculations.
An offer in compromise is not “let’s make a deal,” with IRS agreeing on a number because it makes common sense; it is fitting your finances into the rules contained in the Internal Revenue Manual. At the end of the day, we want the (1) equity in your assets (per IRS formulas) and (2) the amount you can pay the IRS over up to 10 years in an installment agreement (according to IRS calculations) to be less than your tax debt. If so, then an offer in compromise could be for you.
Be careful taking advice to file an offer in compromise unless that person knows the rules in the Internal Revenue Manual, has completed a review of your earnings, living expenses, property ownership and debts, and has shared with you their calculations as to how you match up.
If someone tries to convince you on a phone call to hire them to file a compromise without a comprehensive analysis first, think twice. A compromise does not work that way.
Success with an offer in compromise is not guesswork. It is your finances vs. government formulas and calculations. Because of this, the IRS rejects over 60% of the offers they investigate. Don’t be a statistic. Make sure your advice is from someone with your best interests at heart, and knowledge and experience in the art of IRS compromise.