Do You Need an IRS Offer in Compromise?

A settlement or Offer in Compromise is an agreement negotiated with the IRS to pay less than your total back tax debt. Once a settlement agreement is in place, you will not face IRS collections provided you honor the terms of the Offer in Compromise. If you can afford to pay the IRS some of your tax debt, a settlement can be an excellent solution.

An installment agreement is a negotiated arrangement with the IRS allowing you to pay your tax debt in affordable installments. If you have some income left over after expenses but are not eligible for a settlement, an installment agreement may be viable. You will still owe the original amount (there is no debt forgiveness in this arrangement), but by paying installments you secure lasting reprieve from IRS collections.

IRS non-collectible status is a temporary reprieve based on economic hardship. While you have Status 53, the IRS will not actively attempt to collect your debt. Like an installment agreement, uncollectible status does not reduce the amount of your federal tax debt. Also, you may still face future collection action because the IRS can periodically reassess your case.

Only a highly-qualified tax specialist can confidently assess whether there is doubt as to liability, but possible reasons can include, a) a mistake on the part of the IRS examiner in interpreting the tax law, b) a failure of the IRS to consider your documentation, c) new evidence that you owe less or none of the tax debt assessed.

What kind of documentation might the IRS fail to consider? As an example, sometimes taxpayers submit an initial tax return, but then file an amendment. If the IRS does not process the amended return, they may incorrectly assess your tax debt.

What does new evidence look like? For example, if you have previously-unsubmitted documentation for your write-offs, that may be sufficient doubt as to liability based on new evidence.

Most Offers in Compromise are approved based on a calculation of the taxpayer’s ability to pay. However, your doubt as to collectibility case must be strong.

That doubt is established through an Offer in Compromise formula which takes into account the following:

• Total tax debt owed
• Your total assets at market value
• Your expenses and monthly income
• Whether you propose paying your settlement in five or 24 months
• The number of months remaining on your debt before the statute takes effect

If the calculation shows that your assets and disposable income are less than the total tax debt owed, you may qualify for an Offer in Compromise.

The effective tax administration rationale is for exceptional circumstances; it is only considered after doubt as to liability and doubt as to collectibility are assessed. Exceptional circumstances may apply when there are enough assets or income to pay in full, and no doubt as to liability for the tax, but when collecting the debt in full would be patently unfair.

The IRS looks at exceptional circumstance submissions on a case by case basis. They consider three things: hardship, public policy, and equity.

If based on age, disability or medical condition, you can’t be expected to earn a living, exceptional circumstances based on hardship may apply.

The other two considerations are not as clearly defined but give the IRS leeway to grant an Offer in Compromise in highly unusual circumstances.

When the IRS approves your Offer in Compromise, part of your tax debt is forgiven—often, a significant percentage. The IRS will also cease all collections activity when you pay according to the terms of your settlement agreement.

The Offer in Compromise program is highly advantageous to many struggling taxpayers. The benefits of tax relief far outweigh any potential downside. However, there are a few things you should keep in mind.

While the IRS considers your offer to settle, the statute of limitations on their collections is put on hold. If you are close to the 10-year statute expiration, this hold works against you.

If your offer to settle is accepted note that:

• You cannot later contest the amount in court;
• The IRS will require you to forfeit certain tax credits on your tax return the following year;
• During the calendar year that your offer is accepted, the IRS will apply any refund from your taxes to your tax debt without counting it towards the negotiated Offer in Compromise amount;
• Offers in Compromise are a matter of public record, which is a privacy consideration.

What are the disadvantages if you submit an offer and are rejected?

If you are denied, you may find it inconvenient to have disclosed detailed financial information to the IRS as part of the settlement submission process. The IRS will also keep your initial lump sum payment or periodic payments made while your offer was under consideration.

A tax expert will consider all possible outcomes and protect you from making an application that could hurt you in the long run.

The average Offer in Compromise from year to year is about $6,000 to $7,000. However, the amount that the IRS will settle for depends on your individual financial circumstances.

When we submit the application, it includes a proposed settlement amount. To arrive at that figure, we use a calculation that factors in your net equity in assets and your disposable income over the next 12 or 24 months.

If you can pay a lump sum within five or fewer months, the IRS will only look at the next year of your income and there is a significant discount. If you can pay the offer in six to 24 months, the IRS will look at your disposable income over the next two years and the total settlement amount will be greater.

First, make sure you meet the requirements for eligibility. Our tax experts can determine your eligibility, or you can use the IRS Offer in Compromise Pre-Qualifier.

If you qualify, the next step is to prepare your Offer in Compromise application, including documentation and an application fee. You will also need to submit an initial payment, either a lump sum equal to 20% of the offer or the first initial payment of proposed monthly installments.

From application to acceptance or rejection, the Offer in Compromise process can take up to a year. The average processing time is about six months. If your offer is rejected and you choose to appeal, the entire process from first application to the conclusion of the appeal can be up to 24 months.

While you wait for the outcome of your offer, you must continue to file all required tax returns and submit any tax payments, including estimated tax payments. Failure to do so can sabotage your settlement offer and set you back several months.

The IRS can legally levy your assets at any point up to the official acceptance of the Offer in Compromise — and they can keep those monies. If the IRS has levied your wages, bank or other assets, you may need professional help to have the levy removed. The IRS is not legally required to release a levy that was served before you submitted an offer, but we have a solid track record getting levies released within 24-hours.

Normally, a lien will not be filed until a final decision has been made on your offer. Any existing lien will be released if your offer to settle is accepted and the negotiated amount paid in full.

If you had a pre-existing installment agreement with the IRS, those payments will be put on hold, pending the outcome of the offer. Note that these installment agreements are not the same as periodic payments made as part of the Offer in Compromise.

The average success rate is about 40% and many rejections are due to errors or omissions. It’s important to have expert tax advice, so you don’t waste time and money trying to settle with the IRS on your own.

If you are a good candidate, making a submission through a tax expert can significantly increase your odds of success. We have a 94-95% success rate with the Offer in Compromise program—twice the national average.

Having your submission returned is not the same as a rejection.

The IRS may return an Offer in Compromise if you don’t currently meet the eligibility requirements. For example, if you are in bankruptcy proceedings, haven’t filed required tax returns or paid current tax liabilities, your submission may be returned. The offer may also be returned because it didn’t include the necessary documentation, fee or payment.