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The Offer in Compromise Program: Is it right for you and the taxes you owe.


The radio waves and television are on fire with testimonials about how some company just lowered the amount of taxes owed from one Gazillion Dollars to pennies on the dollar. Is it real? 

Well, not really. 

Everyone who works with taxes for a living has had the client walk in with a letter from the IRS or the State they reside in, Taxpayer Joe has a open balance of $550,000.00 with penalties and interest accruing on a monthly basis...compounding interest on interest. Taxpayer Joe is having a financial meltdown, his wife/spouse/significant other is at home packing bags to head out of country/move back to mom's/divorcing the S.O.B. and they are taking one last stab at finding out what is wrong.

After reviewing the situation, it appeared Taxpayer Joe, just failed to file his tax return (and he knows it, but does not want to admit he dropped the ball), and by filing the tax return, I can claim, I reduced Taxpayer Joe's taxes from $550,000.00 to whatever was really owed or refund from filing the return (if within the guidelines). Ta-Da, the taxes disappeared, and everything is solved and I can release a radio ad with Taxpayer Joe's testimonial.

Without getting lost in the forest giving you a download of information, I will explain the IRS Offer-in-Compromise (also known as the "OIC") program in it's basic form, as each person and case is different.

  1. The OIC is a legal way for the IRS to settle a tax debt owed (within certain guidelines, criminal tax debt is usually out of bounds without the Department of Justice getting involved); through the ability of settling a tax debt for less than the full amount owed with penalties and interest. The IRS recognizes that the OIC program is a viable collection program "when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential."
  2. However, by making a request for a OIC, it will leave with you less benefits over the years that the offer is in place. If you are to receive a refund, the IRS will hold that refund and apply it to the amount of debt owed and not to your OIC balance (which is quite annoying, but we plan for this contingency when working on your Offer). You will be required to file all tax returns timely for a period of time, or they will reopen your OIC and revoke it, bringing back the taxes previously owed.
  3. The IRS has a collection window of 10 years (can be extended through Federal Court intervention, however, that is usually not common). If you submit an offer, the collection window gets put on pause, until the offer has been accepted and paid. If you have 10 years left on your tax debt, an offer is a great idea, if you have less than 4 years left on your tax debt, I recommend other avenues to explore.
  4. You will have to provide the IRS with a complete financial history of bank accounts, retirement accounts, vehicles owned, credit card debt/usage, Lines of Credits balances, houses owned, rental properties owned, business financial statements to include a Profit & Loss and Balance Sheets; Insurance policies with Cash Values, your complete depreciation schedules if you have depreciated property on your tax returns. During this stage of completion, I have to remind clients, if you don't list an item on your financial statements and the IRS finds your assets, it means you don't care about this so they can seize the item. Don't skimp, it is easier to disclose a bank account and explain why it is not listed on your financial statement that you are in charge of for your niece/nephew/parents than not to list the item and have the IRS seize someone else's bank account because your name or SSN is on that account.
  5. There are three main Offer-in-Compromise reasons, and one has to be selected for processing:
    1. Doubt as to liability-Doubt as to liability (DATL's), is when a taxpayer missed the 90 day window for submitting a tax court petition, and is hoping the IRS will accept that the offer lays a STRONG argument for acceptance of the offer. The IRS will weigh the hazards of litigation vs. accepting an offer. One of the more difficult offer's to submit. The answer of "I don't owe it, so sue me" is always the worst answer. This is usually a issue with a tax examination, the Taxpayer and his CPA/EA or tax preparer feel strongly about the issue, but was not able to full fill the requirements to get to tax court on time. I have submitted 3 Doubt as to liability offers in 6 years.
    2. Doubt as to collectibility. In my office of the 900+ offers I have submitted, this type of offer has been submitted 895 times. Taxpayers have to show that the current income and assets that they currently have are less than the full amount owed for taxes. The IRS will use a National and Local Standards for living expenses, and will not deviate (until we head to appeals), when reviewing your offer.
    3. Promote Effective Tax Administration-I have submitted 2 offers under the Effective Tax Administration. Once a offer is submitted under this program, the IRS must find that a true economic hardship exists, the taxpayer has the assets but will be unable to pay basic living expenses, the taxpayers has the assets, but is unable to borrow on the security of the assets (think a house that has equity), and the seizure and sale of the assets would have consequences that would make collection actions unlikely.
  6. Offers take forever to process it seems. I tell clients to expect a 9 to 13 month between the mailing of the offer and the first letter for the telephone conference. I have had one offer process in 90 days and another offer process in 28 months (from mailing, to first letter, negotiating with the IRS, developing a working plan, rejecting the IRS working plan, Appealing and closure from Appeals).
  7. I like to say at my first meeting with clients, that their is a book called the Hitchikers Guide to the Galaxy by Douglas Adams, The book describes that the guide has inscribed on it's front cover the words "Don't Panic". All IRS tax issues can be resolved with careful and methodical planning, but it takes time. Take a deep breath, relax and don't panic. 
Engelbert Tax Services