IRS Back Tax Settlements: The Offer In Compromise

Many taxpayers who find themselves with an overwhelming tax liability look for a quick fix to reduce IRS debt through an IRS back tax settlement. What most are referring to is the Offer In Compromise, or “OIC” as it is called in the resolution industry.

Often incorrectly and deceptively discussed as settling for “pennies on the dollar”, the science of an offer in compromise is actually quite complicated and the art is in knowing what is allowed, the rules the IRS has to abide by, and what items are subject to negotiation and representation. An “offer” is just what it implies – an offer. An offer in compromise is an agreement between a taxpayer and the IRS that resolves liabilities by accepting less than full payment under certain circumstances. The offer in compromise may be considered only after all other payment options have been exhausted.

A tax debt can be legally compromised for one of the following reasons:

Doubt as to liability—there is doubt that the assessed tax is correct.
Doubt as to collectibility—doubt exists that you could ever pay the full amount of tax owed within the statute expiration dates.
Effective Tax Administration—there is no doubt the tax is correct, and no doubt that the amount owed could be collected, but an exceptional circumstance exists that would create a hardship if the debt is paid as such.

Offer In Compromise Criteria

There are four components that are used by the IRS to calculate if they can collect your tax debt in any other way outside of an IRS offer in compromise:

Assets - the amount collectible from your net realizable equity in assets.
Future Income - the amount collectible from your expected future income after allowing for payment of necessary living expenses.
Amounts Collectible from Third Parties - amounts that can be collected from third parties through administrative or judicial action, i.e. amounts collectible through the assertion of a Civil Trust Fund Penalty, a transferee assessment, nominee lien, etc.
Assets and/or Income that are Available to the Taxpayer but are Beyond the Reach of the Federal Government -These are assets that the lien will not attach to, such as equity in assets located offshore and out of the country such as foreign bank accounts, real estate holdings and investments in foreign corporations.

The IRS also has other criteria they consider: age, health, marital status, number and age of dependents, education level, occupation and work experience.

Approximately 25% of the offers received in 2006 were actually accepted by the IRS. While this number seems high, it is rather misleading. This is because the number of offers received has actually decreased over the last 6 years due to a tougher screening process and requirement of nonrefundable payments that must accompany the offer when it is submitted. So while a higher percentage of offers are being accepted, there are fewer offers that are actually being received and reviewed.

Little-Known Offer In Compromise Facts

$150 Application Fee and 20% down payment required at the time of the OIC submission.
Your OIC will be public record for one year; this includes being reported on your credit report for a period of seven years.
You must file and pay all taxes for the next 5 years.
Filing an OIC extends the time the IRS has to collect from you.
The IRS can take up to 2 years to complete an OIC investigation, and penalties and interest continue to accumulate during this time.
The IRS takes any tax refunds you may be expecting for the calendar year the IRS accepts the OIC.
You are required to provide full financial disclosure to the IRS of your finances and tax returns, which may trigger an audit or other investigations.
Defaulting on an OIC will reinstate all penalties and interest.
It’s not always the best option. Other approaches, like installment agreements, may actually save you more money in the long run.

Can I File an Offer In Compromise Myself?

Because of the complexity of the OIC tax settlement process, taxpayers should hire qualified tax professionals to prepare their OIC and negotiate with the IRS.

Some important things to look for in a professional:

Is the tax professional an attorney, CPA or Enrolled Agent?
How many OIC clients does the person handle?
What percentage of clients have been successful in their offers?
What is their fee?
Does the fee include preparation of all unfiled tax returns, IRS forms, all backup documentation, and all negotiation with the IRS?

Beware of Frivolous Offers

The IRS defines a frivolous offer as one without merit or one that is submitted in order to delay the collection process. Multiple OICs filed with the same information or submissions for tax liability that can obviously be full-paid by the tax debtor are also considered frivolous.

You need to be careful and think seriously before completing any OIC package, as the IRS takes frivolous offers very seriously. Submitting the same “offer” or trying to get a “deal” on your tax liability while you can full pay may make you a target for IRS criminal sanctions—especially for those who try to hide assets and income. You should do your financial analysis prior to the OIC submission and be prepared to explain every asset, liability, income, and expense item for the past, present, and future.

“Pennies on the Dollar?”

Taxpayers should beware of certain promoters’ claims that tax debts can be settled for “pennies on the dollar” through the OIC program. Anyone who provides a “predetermined” conclusion about your personal finances and your tax debt is advertising fraudulently. It is easy to merely submit an offer package for someone; anyone can promise that. The success of an offer in compromise is highly dependent on individual situation.

The OIC program is a highly technical and detailed financial analysis that cannot be “predetermined” based on a few facts.

The ultimate goal of an OIC is a compromise in the best interest of both the taxpayer and the IRS. Acceptance of an adequate offer by the IRS will also result in creating for the taxpayer an expectation of full compliance with all future filings and payment requirements.

If you think you may qualify for and offer in compromise or would like to speak to someone further about your tax resolution options, contact Effectur at 1-800-834-7214.

Not sure if this is the solution for you? Continue researching options by selecting another Tax Solution from the left navigation.