IRS Law Blog

You are tired of owing money to the IRS.  That is understandable.  Now, you find yourself considering filing an offer in compromise to settle and get a fresh start.

Before you jump in, it is important to know what happens inside the IRS to your offer after you send it in.  After all, the IRS is a big, often impersonal bureaucracy, and you are asking them to cut you a much needed break.

First, let’s take a look at the IRS offer in compromise process – what happens after you file, when you will hear back, how long it takes the IRS to work your file, and role of the IRS Offer Examiner.   Second, let’s get a better understanding of the Offer Examiner’s guidelines, and what to expect from the investigation.

Offer in Compromise Process

For starters, an IRS offer in compromise investigation does not take days, or even months. The IRS routinely takes up to 12 months, often longer, to complete its work on your offer.

Most of that time is spent with your offer being processed by the IRS OIC Central Processing Unit, followed by assignment to an OIC investigating group, and then placed in the inventory of an agent trained to investigate your offer in compromise.  These agents are known as IRS Offer in Compromise Examiners.

When the OIC Examiner receives your file – usually several months after you file – they will then need to slot it into their case inventory.  As there are more compromises filed than IRS resources to work them, it can take the OIC Examiner months to get to your file to the top of their pile.

This process alone – from the filing of the offer to the OIC Examiner putting you at the top of the pile – can alone take 6-9 months.  That can be followed by a three month process of actual investigation of your OIC by the Examiner.  And suddenly, you have 12 months invested in your compromise.

But wait…the IRS Examiner may decide to recommend rejection, not acceptance, of your offer in compromise.   Yes, acceptance is not a foregone conclusion – the IRS rejects 60% of the offers they investigate.

If your offer gets rejected, and we disagree, the IRS permits us to file a dispute, requesting that the offer be assigned to an independent IRS appeals officer.  This will result in a hearing to overturn the Examiner’s decision.

After you file an appeal, the IRS will move your file from the OIC Unit to their Office of Appeals.  It can take several months for the file to get to an appeals officer, who will then contact you and set a date for a hearing. The appeal process will add another 3-6 months to your time invested.

You may be getting the idea that an offer in compromise is not a quick and easy fix, and you would be right.

As we now know the road to compromise can have has twists and turns, let’s now get a better understanding of the Offer Examiner’s guidelines, and what to expect from the actual investigation.

IRS Offer in Compromise Guidelines

There is a reason your offer has a decent chance of being rejected:  The IRS has written guidelines that the OIC Examiner is trained to use in the investigation.  These guidelines are not necessarily written in your favor, but rather to the benefit of the IRS.

If you are curious to see the IRS offer in compromise guidelines, they are available to you at www.irs.gov/irm/part5/irm_05-008-005r, Internal Revenue Manual Section 5.8.5, Financial Analysis.

These guidelines are the rules the IRS uses to analyze your finances. And it is your finances –  what your earn, spend, and the value of your assets – that are used by the IRS to determine if your offer should be accepted.

The guidelines include IRS policies on valuing your house, autos, bank accounts, personal property, retirement account, life insurance, and business assets.  They also include instructions to the Offer Examiner on how to analyze your earnings, and if the IRS approves of how you spend your money, both of which are factored into the IRS settlement calculations.

For example, on your house and autos, the Internal Revenue Manual requires the IRS to reduce the value by 20%, which is good for you.  That means if your house is actually worth $200,000, for purposes of the compromise, the IRS will use $160,000, a 20% reduction.  If you owe $170,000 on your mortgage, then there will be no equity in your house to offer the IRS in your compromise.

But the Internal Revenue Manual gives and takes away.  When reviewing your spending, IRS offer in compromise policy is to limit your lifestyle.  For example, if you have a car payment of $600/month, current IRS guidelines require the OIC Examiner to limit the expense to $508/month.  That would be $92/month more for the IRS ($600 – $508) that you don’t have.

And if you have monthly credit card expenses, you can forget the IRS allowing you any of those payments.  For example, if you spend $500/month on credit cards, the OIC Examiner will want that money for the IRS, not your credit card companies.

The result of the IRS imposing its will on your auto payments and credit cards would be an extra $592/month to them.  The IRS will then take the extra $592/month that you don’t have, and use it to reject your compromise by calculating that you can pay a higher amount that offered.

IRS policy requires a similar review and limitation on what you spend on food, clothing, housing, utilities, and medical expenses, to name a few.

There is no reason to invest this much time into a process that will end with disappointment.  Because of that, if you are considering an offer in compromise, it is important to know what you are getting into before you file, and that IRS guidelines will not handicap you.  There can be better alternatives to an offer in compromise – including an IRS payment plan, a hardship claim with no payment required, expiration of the 10 year statute of limitations on collection, or bankruptcy – that could save you the time, twists, and turns of an offer in compromise.