Offer in Compromise: How to Qualify

If you have an IRS tax problem you have one of three tax reliefs, first is an installment agreement, the second is currently not collectible status and the last and possibly the best is offer in compromise.

Like everything else in life, good does not come in cheap. Some estimate that only 13% of the offers are accepted by the IRS.  We will venture and put this anemic result under three reasons:

First reason is reluctance from the IRS itself. The IRS acts as though this money that pays for the program (or the money forgiven) is paid for by the flesh of its employees. We have seen offers killed by the IRS even though the amount was agreed upon just because the taxpayer did not file a 1099 some years past; some excuse for rejecting an offer in compromise!

Second reason should be attributed to those who prepare the offers and counsel the taxpayers. Some of the preparers such as CPAs, tax attorneys or enrolled agents do not take the time to think the offer through and do the proper calculations. 

One of the reasons tax practitioners submit offers that are constantly rejected is an erroneous commitment to their clients that they qualify for an offer in compromise when they should have been told that they do not qualify in the beginning.  Practitioners submit offers to summarily dispose of their obligation to the client knowing that the offer will be rejected or worse yet having no idea if that offer is good or not.

The third reason rests with the taxpayer themselves. When people have a tax debt to the IRS, or owe back taxes, the first impulse is to shrink and hide everything. This may sound intuitive but in fact this may cause them not to qualify and thus they are denied tax relief that was within their reach.

We know that to qualify for an offer in compromise we look at both your assets (what you own) less any loans on those assets.  If you have a house worth $100,000 and the loan is $101,000, you are upside down on the house and you own nothing and the IRS will treat you as such. So, if they look for assets you have got none.

The other things that the IRS looks at are income and expenses.   If your income is less than expenses (the expenses that the IRS allows you to claim) you have no ability to pay. Thus if you have no assets and you have no extra money from your income, you are a good candidate for an offer in compromise.

The emphasis that we would like to make here is on the expenses and how taxpayers approach it. Taxpayers, in general, believe that the poorer they look the better off they are in handling their tax settlement with the IRS. This is generally true most of the time but not all the time.

Let us give an example. Sometimes a taxpayer prefers to drive a beat up car to show the IRS how destitute they are when in fact they are better off if they had a new car! Strange as it may sound, it may be the only way that will allow an offer in compromise to be accepted. 

Let us assume that a taxpayer has an IRS debt of $15,000. Let us also assume that the taxpayer makes $3,000 a month and has no car payment but drives a 1985 beat up Dodge that breaks down every day. 

Let us also assume that when we added the expenses for the taxpayer the total came out to be $2,700. If we submit the offer in compromise like this the IRS will reject it and will say that he can pay $300 a month against his IRS debt of $15,000.  They have 10 years to collect $300 per month. So they know they can collect from him up to $30,000 in those 10 years.

Now let us assume that the taxpayer wanted to go in style and buys himself a brand new Toyota with a payment of $350 a month. That puts the taxpayer in front of the IRS with a negative cash flow of $50 and hence allows him to qualify for an offer in compromise which means he will pay some dollar amount that could be as little as say $100 (can be anything but zero) to settle his back taxes of $15,000.

In summary, sometimes you are better off if you live your life naturally even though you are getting ready to submit an offer in compromise. Machination may adversely hurt taxpayer in settling their IRS debt.