Written by Peter McFarland, Esq.
Offers in Compromise are always a hot topic with clients when discussing unpaid taxes. However, some practitioners do not understand how difficult submitting an offer can be, and this confusion is often passed down to their former clients who wind up in our office when the first offer was not accepted.
That being said, a successful offer is an extremely powerful tool to settle an IRS debt for sometimes a fraction of what the IRS says is owed. Not all offers settle for so little, it really is dependent on your particular financial situation. It is best to consult with an experienced professional who has experience submitting offers to determine if an offer would be the best strategy for your individual situation.
Offer in Compromise Defined
An Offer in Compromise is exactly like it sounds. It is an offer of a lesser amount of money to compromise the total amount that will be paid to the IRS. A taxpayer may generally pay a single lump sum, pay five installments, or pay 24 installments to settle the debt.
Requesting an Offer in Compromise
Requesting an Offer in Compromise is a large undertaking that is best done with the help from an experienced professional. Before filing an offer, a taxpayer needs to be compliant with filing all tax returns.
An offer consists of two IRS Forms along with all manner of back-up documentation. One form requests information concerning assets, including bank accounts, investment accounts, 401(k)s, IRAs, safe deposit boxes, credit cards, life insurance, real property owned, vehicles owned, and ends with a breakdown of monthly income and expenses. The other form asks why the IRS should consider accepting a smaller amount of money and sets the payment amount and terms.
As I mentioned, the taxpayer must provide a breakdown of monthly income and expenses. Any income left over after taking out “necessary expenses” has a large bearing on the amount of the offer. While I could go and create some monthly expenses today to attempt show the IRS I couldn’t pay anything (a nice Caribbean vacation paid for on a credit card for example), the IRS would cut through those attempts and say that only “necessary expenses” will be considered in offsetting your income.
This limitation on necessary expenses may mean that even though you live paycheck to paycheck, the IRS may still try to include much more of your paycheck in your offer’s monthly payment because it will decide that not all of the expenses you pay are “necessary.” It is crucial, therefore, to discuss a potential offer in compromise with an attorney to ensure you are maximizing your allowable expenses and agreeing to an offer amount you can really afford.
Other Special Considerations
The IRS will also look at the years just before filing the offer to be sure a taxpayer did not dissipate assets. The most common example of this would be withdrawing from your 401(k) early and buying that new car you’ve always wanted or renovating your kitchen. Other examples include taking out a line of credit on your house or selling other assets without making any payments to the IRS. If you find yourself in these situations, the IRS will attempt to include those amounts in a counteroffer whether you can afford the higher offer amount or not.
Another IRS tactic is to average a taxpayer’s income over three years rather than looking at the current year’s income. The IRS does this most often when the taxpayer had a high-paying job in the past but now is unemployed. Self-employed individuals may also find themselves in this situation if their business income is not steady.
There are ways to combat these tactics, however. If these examples describe your situation, our attorneys can still help you negotiate a collection alternative and stop enforced IRS collections.
Offers in Compromise can be an extremely powerful tool in a taxpayer’s arsenal. Unpaid taxes can often be settled for much less than the full amount the IRS says it is owed. However, the IRS is very strict in its guidelines to settle these debts and the negotiations can often become very technical.
Further, many practitioners tout themselves as understanding the Offer in Compromise process. The stark reality is that the offer process is extremely arduous and technical. It is best to meet with a professional before hiring them to file an Offer in Compromise on your behalf to find out how experienced they are.
Estill & Long, LLC, for example, has been filing Offers in Compromise for many years. Our attorneys are very experienced with Offers in Compromise and understand the intricacies of the Internal Revenue Service and the Service’s handling of these settlements. Call the office today to speak to one of our attorneys if you interested in exploring an offer today.
About Peter McFarland, Esq.
Peter earned his Juris Doctor (J.D.) degree at the University of Denver. After becoming licensed to practice law in the State of Colorado, he earned his Master of Laws (LL.M.) in Taxation at the University of Denver. In his current role, Peter represents taxpayers before the IRS and in the United States Tax Court. He gained valuable experience as an attorney with the University of Denver’s Low Income Tax Clinic during his graduate school studies and has been representing clients at Estill & Long, LLC since his arrival in early 2013.