The IRS Offer in Compromise program, the one you hear about on radio and TV…really exists. It actually works too. Many people settle tax debts with the IRS every year. But…it isn't for everyone. In fact, most Offers in Compromise filed with the IRS are rejected for a number of reasons. You can read more about that here.
Just as important…many who qualify for an Offer in Compromise choose not to file one.
Strange I know… but it happens all the time, and here are 5 common reasons why.
Tax and other debt
If you have old tax debt and much of it is “dischargeable” in bankruptcy AND you have other debt that needs to be dealt with in bankruptcy, then an Offer in Compromise may be a waste of time and money.
This isn't true in every case, and there are reasons why people who have tax and other debt can't use bankruptcy without some negative side-effects, but it is usually the case that bankruptcy makes more sense.
Not a great candidate for an offer in compromise but a good candidate for a bankruptcy
What if a taxpayer had a large tax debt as a result of under-withholding for several years and the total tax debt is $80,000.00. The IRS is threatening collection. He can't pay it in full over the time left in the statute of limitations for collection and his best offer in compromise number would be $25,000.00. Assume as well that he would qualify for a bankruptcy and that the bankruptcy would discharge his entire tax obligation.
He doesn't have access to the $25,000.00.
A bankruptcy may make more sense.
Difficulty remaining in “compliance”
In order for an Offer in Compromise to work permanently, the taxpayer has to remain in absolute compliance with the tax code for a 5 year period after acceptance of the Offer. If a tax return is late or if a new debt is incurred, the offer is revoked and the complete amount of debt with it's new interest becomes collectible once again.
One of the lesser known aspects of an Offer in Compromise is that in order to be ‘permanently' accepted, the taxpayer must remain in complete compliance with the tax code for a period of 5 years after the offer was accepted. Failure to do so, by not filing returns or by creating a new liability, means that the offer is undone, and the complete amount that was settled comes back into play.
If a taxpayer is going to have a hard time remaining in compliance, then another option may make more sense.
Previously filed and rejected Offers in Compromise
Many people think that filing an offer in compromise is just filling out some paperwork. In very simple cases, it can be not much more complex than that. But in most cases, a story has to be told; a factual story that will convince the IRS to agree to the proposed settlement. The filer has to understand all of the rules and exceptions to the rules as well. Failure to tell the story properly and/or failure to know the rules and their exceptions will usually end up in a rejection.
Most Offers in Compromise are rejected and the belief that filing an offer is just filling out some documents and crossing fingers… is the primary reason why.
A common example we see is the taxpayer that has been filling out a financial statement and sending it with a 656 form over and over again. Each time the offer is rejected and the statute of limitations on collection is extended.
But also each time an Offer is filed the IRS sees that filing adds to the bad faith the IRS already sees in the taxpayer. When the newest Offer is filed the IRS won't take it seriously.
Statute of Limitations on collection isn't far away
Imagine that you filed a return on April 15, 2005. If no tolling of the statute has occurred as a result of a bankruptcy filing, a previous offer in compromise, or certain appeals/litigation, the IRS' 10 years to collect the debt is about to run out.
Imagine as well that the $150,000.00 dollar debt that has accrued with penalty and interest would likely settle via offer in compromise for $25,000.00.
Sounds great right?
Imagine as well, that the IRS would agree to a $750.00 payment each month toward the debt or that you were already in that payment plan.
Would you file the offer in compromise? I would advise you not to.
Why? You have about 8 months before the statute of limitations on collection kills the debt owed to the IRS. A payment plan at $750.00 for 8 months ends up being a lot less than $25,000.00. The offer in compromise would extend the collection statute and if it didn't work out, the taxpayer would be at square one, and there won't be any 5-year look back issue mentioned above.