Offer In Compromise
What is an Offer in Compromise?
The Ultimate Tax Settlement Solution
Simply stated, an offer in compromise means that you will pay less taxes than your tax debt. How much less will depend on your financial situation. Basically, the IRS uses a formula that factors income, expenses, various percentages of assets owned, and other unique items.
Let us state at the outset that the IRS will not grant you a dime of tax relief unless they realize that all they can get to settle your tax debt is actually what you offered to them. If you decide to present the IRS an offer in compromise with an amount that was arbitrarily selected, rest assured the offer in compromise department will deny it. A specific formula is used to calculate a precise amount that a taxpayer should use when submitting their offer.
The IRS Can Be Wrong
Due to the great size of the IRS, on occasion, even if an offer amount is accurate, the IRS has offer examiners that will challenge your proposed amount simply because of being unaware of new offer regulations IRS has recently implemented to potentially make offer acceptance more favorable. Should that event come about as it has for some of our clients it’s important to be prepared to aggressively dispute the incorrect position of the IRS agent to ensure correct handling of case. To successfully do this would require technical knowledge only a tax professional would know. That alone can serve as a primary reason one should consider using a tax professional.
That said, there are firms that claim that they will settle at a fixed amount of “pennies on the dollar”. This is nonsense. The settlement does not depend on how much you owe, it depends on how we will demonstrate to the IRS that a certain amount is all they can collect from you. It is conceivable that we offer the IRS $100 on a $1,000,000 case and $10,000 or more in $100,000 case. So again, it’s not how much you owe.
Let us cite some examples to illustrate the points that we are trying to make above.
Who is Eligible?
Offer in Compromise Example #1
You owe IRS $300,000 for back taxes when you were wheeling and dealing. Now you are retired and your only income is $1,000 from Social Security. Your monthly expenses are $1,100. You owe nothing in life and you don’t have an automobile. First: Do you qualify for offer in compromise? Second if you do, how much of the $300,000 IRS tax debt should we offer?
The answer is intuitive in this case. You have no assets and you have income less than your expenses. Because we cannot offer $0, we theoretically offer $1 to settle your $300,000 tax debt. Sounds unbelievable, but it’s the law.
Offer in Compromise Example #2
You owe $13,000 of back taxes to the IRS and now we are motivated to settle the tax debt. You are on Social Security of $1,000 per month but you have $500 in the bank and a car worth $2,000. In this case we must offer the IRS the $500 that you have in the bank plus some percentage of the value of the car. The total that we will offer the IRS in this case as tax resolution to your IRS problem is a little over $2,000.
I am sure the question on everyone’s mind is: “You mean to tell me that you made an offer in compromise of $1 to settle $300,000 of tax debt and a little over $2,000 to as an IRS tax settlement for a tax debt of $13,000?” The answer is “YES” you are exactly right. Now then it is a high time for a general principle for negotiated IRS settlement. It is not how much IRS debt you owe, it is how much net assets you have and how much income left over your monthly expense that you can pay the IRS to settle your back taxes.
What happens to the interest and the penalty? Will you enjoy penalty abatement because of that offer? Absolutely. When you have an offer in compromise, you can kiss the penalty and interest goodbye. You are settling your tax debt for a specific amount. Your IRS tax settlement presumes that in the tax settlement you have sought tax relief of an abatement of penalty and interest as well.