My Life in Tax Law: The Offer in Compromise – If It Were That Easy Everyone Would Do It
I fall asleep late. I am not an insomniac thank goodness, but I do fall asleep late. Late enough to see the television commercials from all those outfits that promise me that if I just call the number on my television screen, their team of top-notch former IRS attorneys and accountants will get the IRS off my back. Some even have “testimonials” from people who claim their IRS tax debt has been settled for as little as pennies on the dollar … and the sun is shining again.
Well, let’s start with the obvious: It is called an “Offer” in Compromise for a reason. The IRS is not obligated to accept your offer and far more often than not the IRS rejects Offers in Compromise. But don’t take my word for it. For you “show me” state types I refer you the page 41 of the Internal Revenue Service Data Book, 2012. On page 41 is Table 16, Delinquent Collection Activities, Fiscal Years 2011 and 2012. In the middle of the page you will find the following statistics issued by the IRS: In 2012 64,000 Offers in Compromise (OIC’s) were received by the IRS while 24,000 were accepted. Yup, that’s right. Roughly 38% of the OIC’s were accepted meaning roughly 62% of the OIC’s were rejected. How are those top-notch former IRS attorneys and accountants looking now? What’s up with this?
Well here is my two cents. I have been doing this for 23 years. I have engineered many a successful OIC and they all have one thing in common … they are really hard to do. I have never had an OIC where we just send in the form 656 Offer in Compromise, and the forms 433-A/B/F and then a few months later get the good news … the offer is accepted!! Nope. The IRS usually takes a few weeks just to acknowledge receipt of your OIC. Then you get a letter that your OIC has been assigned to an IRS representative and that you will hear back within a few months. When you finally hear from the representative, he or she will most likely want to review the information you put on your aforementioned forms and want to discuss what sort documentation he or she needs you to send to SUBSTANTIATE the information. After you send the documentation the IRS representative will most likely want to discuss this with you and often will request additional documentation to substantiate your assets and income. For those of you who are married, be prepared for the IRS representative to inquire into the assets and income of your spouse – not necessarily to establish liability, but to give a more complete picture of what assets and income might be available to the taxpayer submitting the OIC. As I often tell my clients, if your spouse is Oprah, don’t expect much of a discount.
This last part can take the taxpayer by surprise. “Are they (meaning the IRS) allowed to request my wife’s financial information,” I am asked. You bet. See above … you are making an “Offer.” They are not required to accept your Offer. If you want something from the IRS that they are not required to give you, then you better be prepared to give them something that you may not otherwise be required to give them. Give and take.
Now, if you jump through all the hoops, and you can substantiate your lack of assets and income, and you make a “reasonable” offer, you just might find yourself in the 38% (to use 2012’s numbers) of OIC’s that are accepted! What is “reasonable” you might ask. That is the “$64,000” question to be sure. Well every case will be different and I can only speak for myself. Pennies on the dollar? Not likely. In my experience the IRS often starts “listening” at roughly 30 cents on the dollar. As you fall below this level, be prepared to SUBSTANTIATE your lack of income, resources, and prospects. I have never had one of those “pennies on the dollar” offers. My impression is that to achieve such a settlement, your situation must be so dire that your tax debt is often the least of your problems … if you can imagine that.