IRS Offer in Compromise

Can you really settle IRS debt for less than you owe?

Sometimes.

An Offer in Compromise is a real IRS program that allows qualifying taxpayers to resolve a federal tax liability for less than the full amount owed.

But owing the IRS a large amount doesn’t automatically mean you qualify.

Before I recommend an Offer in Compromise, I want to understand your IRS account and your financial situation. That includes your income, allowable living expenses, assets, equity, tax years involved, filing compliance, and how much time the IRS has remaining to collect the balances.

Then we can determine whether an offer actually fits.

I don’t start with, “How much should we offer?” I start with, “What do the numbers support?”

How does the IRS evaluate an Offer in Compromise?

For most offers based on inability to fully pay the liability, one of the central calculations is what the IRS calls reasonable collection potential.

In plain English, the IRS is looking at what it believes it can reasonably collect based on your financial circumstances.

Two important parts of that analysis are:

• The value and equity in assets you own
• Your ability to make payments from future income after allowable expenses

The IRS also uses financial standards when evaluating certain living expenses.

That’s why two taxpayers who owe exactly the same amount can have very different Offer in Compromise outcomes. The tax balance alone doesn’t answer the question. The financial information does much of that work.

What has to happen before the IRS will consider an offer?

An Offer in Compromise has eligibility and filing requirements.

Before preparing one, we determine whether required tax returns have been filed, whether current tax obligations are being handled as required, and whether anything else on the IRS account needs to be addressed first.

Bankruptcy can also affect eligibility. For business taxpayers with employees, current payroll tax compliance matters as well.

This is another reason I don’t begin by filling out an Offer in Compromise application. I begin with the account.

What does it cost to submit an Offer in Compromise?

The IRS generally requires an application fee and an initial payment when an offer is submitted, although exceptions apply to qualifying low-income taxpayers.

The payment requirements also depend on which payment option is being proposed.

Those amounts and IRS procedures can change, so we confirm the current requirements when an offer is being prepared rather than relying on an old number from a website.

More important than the application fee is deciding whether filing the offer makes sense in the first place.

What happens while an Offer in Compromise is pending?

IRS levy activity is generally restricted while a properly submitted Offer in Compromise is pending, subject to applicable exceptions.

There is also a tradeoff that needs to be considered: the time the IRS has to collect the tax can be affected while the offer is under review.

That’s one reason an offer shouldn’t be filed simply to see what happens. Before submitting one, I want to understand both the potential benefit and what filing it means for the account.

What if an Offer in Compromise isn’t the best option?

Then I want to know that before we file it.

An Offer in Compromise is one IRS collection alternative. It isn’t the objective.

Depending on the facts, an installment agreement, Currently Not Collectible status, penalty relief, payment of the balance, or another approach may make more sense.

Sometimes the most valuable conclusion from an Offer in Compromise analysis is that another resolution is better.

The goal is to resolve the IRS problem in a way supported by the facts, not to force the taxpayer into a particular program.

What if the IRS rejects the offer?

An IRS rejection isn’t necessarily the end of the process.

Offer in Compromise rejections generally come with appeal rights and a deadline for exercising them.

If we disagree with how the IRS evaluated an asset, expense, income item, or another part of the offer, we review the determination and decide whether an appeal is appropriate.

That’s where the work behind the original offer becomes especially important. The financial position needs to be supported by records and by the IRS rules that apply to the case.

Can you file an Offer in Compromise yourself?

Yes.

The IRS publishes the forms and provides tools taxpayers can use to learn about the program. A straightforward financial situation may not require professional representation.

Professional analysis becomes more useful when there are substantial assets, business ownership, variable income, multiple tax periods, unusual expenses, valuation issues, a previous rejection, or uncertainty about whether an offer is actually the best resolution.

That’s where I want to run the numbers before recommending anything.

How I handle an Offer in Compromise

1. Get authorized. We file a power of attorney so I can communicate with the IRS on your behalf.
2. Review the IRS account. We identify the balances, tax periods, filing history, collection activity, and applicable collection dates.
3. Address filing and current compliance. If something needs to be corrected before an offer can be considered, we address that first.
4. Analyze the financial information. We review income, allowable expenses, assets, equity, and the other information the IRS uses in evaluating an offer.
5. Compare the alternatives. Before filing, I want to know how an offer compares with the other collection options available.
6. Prepare and submit the offer. If the numbers support it, we prepare the financial disclosures, supporting documentation, and Offer in Compromise submission.
7. Handle the IRS review. We respond to questions and requests from the IRS and, when appropriate, address a rejection through the available Appeals process.

I’ve Been Writing About Offers in Compromise for Years

An Offer in Compromise isn’t a service I added because tax-debt settlement became popular advertising. I’ve been working with and writing about IRS collection alternatives for years.

My first book, IRS Secrets Revealed: How to Survive IRS Audit, Collections & Appeals, includes an entire section on collection alternatives, including Offers in Compromise, Currently Not Collectible status, payment arrangements, Collection Due Process, and Appeals.

I later wrote How to Get Out of IRS Problems, which takes a broader look at resolving IRS debt and includes Offers in Compromise as part of that larger process.

My professional experience has continued to develop since those books were written, including becoming admitted to practice before the United States Tax Court as a non-attorney practitioner.

The books can’t tell you whether your offer will be accepted. Neither can an advertisement. That requires looking at your IRS account, your financial information, and the rules that apply to your situation.

What the books do provide is tangible evidence that I’ve been working with, studying, and writing about IRS collection and resolution issues for a long time.

Complimentary PDF copies of both books are available through BestTaxPro™.

Get Josh’s complimentary eBooks

Why work with BestTaxPro™?

You’ll work directly with Joshua A. Webskowski, EA, CFP®, NTPI Fellow, USTCP.

Josh has worked in taxation since 2003 and has represented taxpayers in IRS collection matters, examinations, and Appeals.

He is an Enrolled Agent, a CERTIFIED FINANCIAL PLANNER® professional, a Fellow of the National Tax Practice Institute, an author on IRS representation and resolution issues, and is admitted to practice before the United States Tax Court as a non-attorney practitioner.

His CFP® certification adds a broader financial perspective when a tax-resolution decision affects cash flow, assets, retirement accounts, or business decisions. His authority to represent taxpayers before the IRS and U.S. Tax Court comes from his EA and USTCP credentials.

Most importantly, an Offer in Compromise is evaluated against the alternatives before anything is filed. The right resolution is the goal, not a particular program.