If you have a tax debt with the IRS, then you have probably considered filing an offer-in-compromise. Large national tax resolution firms heavily advertise how they can your settle tax debt for pennies on the dollar, but is it really that easy? In this article, I will give you a general idea of what an offer-in-compromise is, how it is done, and some things to consider before filing one.
So, what is it? An offer-in-compromise is a program offered by the IRS that allows a taxpayer to settle their debt for less than what they owe. The IRS offers two types of offer-in-compromises—lump sum offers and deferred payment offers. A lump sum offer-in-compromise is where the total amount offered is fully paid within 5 months of the offer being accepted. A deferred payment offer-in-compromise is where the total amount offered is fully paid within 24 months. A general rule of thumb is that the amount offered in a lump sum offer-in-compromise will be less than that offered in a deferred payment offer-in-compromise. Whether you do one or the other will depend a lot on your specific financial circumstances.
So, how is it done? Well to start, there is a lot of documentation involved in submitting an offer-in-compromise. This is because a full financial disclosure regarding your assets and cash flow is required. This is where things can get tricky. The first step is knowing how to value your assets and what exclusions to apply to their value. The next step is correctly calculating your cash flow. Cash flow is your income minus necessary allowable expenses. Performing this calculation correctly depends largely on knowing what expenses are allowed. If you submit an offer form with your actual expenses, there is a high likelihood that the IRS will reject or reduce a lot of your expenses.
Now let’s look at some things to consider before moving forward with an offer. First, this is not a quick fix. The IRS can take 6-12 months to investigate an offer-in-compromise and any appeals can take an additional 6-9 months. Second, there is no guarantee that your offer will be accepted. The IRS accepts about 25-30% of the offers that it receives, and a lot of these are accepted only after going through the appeals process. Lastly, an offer-in-compromise may not be the best option for you if, amongst other things, the collection statute expiration date for your liability is in the near future or you do not have the financial means to come up with the money for an offer. In such a case, an installment agreement or being placed in a currently not collectible status may be a better option.
This information is a great start to becoming more knowledgeable about offer-in-compromises. However, it is highly advisable to consult with an attorney or tax professional before submitting an offer-in-compromise due to its complicated nature.