Affordable Payments

What is an Offer in Compromise? 

It is common for a taxpayer to be unable to pay his taxes in full.  The Offer in Compromise program for the Internal Revenue Service as well as for various states participating in an offer in compromise program (states with offer in compromise) or other entities attempts to bring a business approach to the probability of collection of the assessed tax, penalties, and interest claimed by the Internal Revenue Service or State. When the Internal Revenue Service or State accepts the Offer in Compromise, the underlying taxes, interest, and penalties previously claimed are settled with the IRS or state for the accepted amount.  There will be other conditions, such as filing future returns on time, no extensions for filing, and the like, but the core is the IRS or state agrees to accept a lesser amount than claimed.

Why an Offer in Compromise is accepted?

Theoretically, the Offer in Compromise is accepted because the IRS or state believes the amount settled is better than maybe collecting the same or higher amount at great expense in governmental resources.  However, there are many other reasons why an offer might be accepted. 

• The government has a legal out when it bungles on tax collection efforts

• Favors are more easily handed out to well connected taxpayers

• The government - particularly the IRS, can appear to be strict in collections, but lenient on offers in compromise, bringing some reality to an otherwise surreal agency

• Genuine taxpayer hardships can be taken into account in settlements.

When is an Offer in Compromise submitted?

Like life, timing is everything. For example, if you will owe the IRS for 2002 and it is already December 2002 you would probably want to wait until you file your 2002 tax return so that amount can also be included in the offer.  You want to make your offer while you are working as most from unemployed persons are returned unprocessed with a note:  let us know when you go back to work.  The official rules are you can submit an offer in compromise at any time.  That is true.  But not beneficial.

Where is the Offer in Compromise submitted?

Generally, if you have a Revenue Officer on your case, the offer would be submitted to that person.  If you do not have a Revenue Officer on your case, the offer would be submitted to the Center defined by the IRS for your residence address.  Generally, that is Memphis or Holtsville Centralized Offer in Compromise Center, the choice of which depends on your state of residence.

Who can submit an Offer in Compromise to the IRS?

Any taxpayer with a balance can submit an Offer in Compromise at any time, provided it is not for the purpose of delaying collection efforts. See the following additional information on Offer in Compromise.

Do I qualify for ¢ on the $?

The Internal Revenue Service has had the ability to compromise liabilities owed to the United States Government for many many years. This taxpayer benefit has been applied inconsistently to taxpayers around the country (click here to see how inconsistent the IRS is toward Offers).  It has been a process known to only a few and usually benefited only the well-connected and wealthy taxpayers of the country.  For example, even in the nineties, taxpayers in Florida were denied this benefit until knowledgeable taxpayer representatives forced the issue through the use of elected representatives.  Even today, if you live in Arizona, you will be denied a speedy resolution of your Offer in Compromise.  The managers of the various IRS Districts have been accustomed to setting their own priorities and many of them do not relish cutting deals with taxpayers regardless of the benefit to the Government and the taxpayer.

For many years there were two types of offers:

• Offer in Compromise on Basis of Liability

• Offer in Compromise on Basis of Collectibilty

In 2000 another category was added:

• Offer in Compromise on Basis of Effective Tax Administration

A layman might think "Well, it seems everyone is getting a deal on their taxes.  I think I'll offer, say, twenty cents on the dollar."

Sorry, it just doesn't work that way.  The great majority of taxpayers will have to pay their taxes in full. Submission, negotiating, and winning acceptance of an Offer in Compromise is more art than science.  Many variables outside the control of the taxpayer impact the decision.

Here are a few historical variables in offers on the basis of Collectibility.

• Training and temperament of the Offer Specialist at the IRS assigned to the case.

• The county, state, and IRS District controlling the offer.

  • Some Counties are difficult because of unrealistically low standard expenses published by the IRS.

  • Some states of residence experience much longer waits for IRS decisions.  Arizona has been a real problem.

  • Some IRS Districts flaunt the rules and the law.  Florida is rife with Revenue Officers working their own agendas.

  • The collection chiefs in some districts (Oklahoma for example) have been known to measure the success of their employees by the number of seizures completed, negating the purpose of an offer.

• Changing circumstances can greatly impact an offer.

  • Pay raises or improved financial prospects.

  • Marriage or taking a roommate who shares expenses impacts income and expenses when evaluating an offer.

  • Changing your residence even to another county can make or break an offer.

  • A child leaving home can lower your allowable dependents, breaking an offer.

  • A serious illness may or may not be "allowable" in the IRS' eyes.

  • If you are laid off at work, you will find the IRS wants to average the pay you got before the termination, but if you get a raise, the IRS will try to forecast that you will be making that much way into the future and will continue to get similar pay increases.

  • The IRS might try to tell you that your wife can work instead of staying at home with small children, or that your car is unacceptable, or that you have to move.  When gall is being measured, the IRS employee is way off the scale folks.

• Unless you have seen many offers, there is no way even an informed taxpayer can evaluate what is going on.

• Professional representatives who deal daily in these matters can pull a rule or regulation to the client's benefit in one jurisdiction to another jurisdiction, challenging the decision of the player at the IRS.  There is no way a taxpayer or inexperienced representative can know these things.  They are published nowhere.

Offers are generally accepted for Taxpayers where:

• There is a high probability that they don't owe the tax and  other methods of  appeal are not available such as tax court, abatement, etc.  This is Offer on Basis of Liability.

• The taxpayer cannot afford to pay in full  based on an inflexible set of rules for allowable expenses. This is Offer on Basis of Collectibility.

• The taxpayer doesn't qualify under the above two examples, but the money for the taxes is needed to support the life or health of the taxpayer or a member of the household the taxpayer supports.  For example, a child with brain cancer who has exhausted the available medical insurance yet requires additional hospitalization or other urgent care. This is Offer on Basis of Effective Tax Administration.

The Risks in Submitting Your Own Offer

An Offer in Compromise is prepared and submitted as instructed in the new 48 page set of instructions and forms.  (You will need the Adobe Acrobat Reader to view these documents). Supporting documentation must now be supplied with the original submission.

Based on the submission, the IRS will determine if the Offer in Compromise is "PROCESSIBLE"  If it is not processible it will be returned to the preparer so indicated. This does not mean it has been rejected.  It only means that it must be reviewed and corrected to bring it to a processible state.  Processible means it appears on the surface that an offer might be possible.

IRS personnel will then put your offer in the hopper for investigation.  This means that one day in the future from 60 days to 5 years later, the IRS will want to discuss, investigate, negotiate and try to kill your offer.  Remember, IRS personnel are enforcement officers, THEY CANNOT BE YOUR FRIEND.

If the IRS is dealing directly with a taxpayer, the taxpayer is at the mercy of the particular offer specialist at the IRS as to whether or not they will give the taxpayer a break.  The taxpayer, being naturally nervous and apprehensive, will undoubtedly make many mistakes in pushing his own case with the IRS.  Remember, if you say it, or even if the IRS thinks you say it, you are stuck with it.  That is why so much of the communication with the IRS Offer Specialist MUST BE IN WRITING, CHECKED, DOUBLE CHECKED, AND CHECKED ONCE MORE. The impact of the answer must be fully understood by the taxpayer or representative.  There are countless tricks and traps to blow an offer out of the water. 

For example, a call comes in from the IRS:  "Just have a few questions to finalize this offer.  Say, did you get a raise last year? How much?  Your wife? (Combined increases of $120 per month on gross W-2 income of $3,600 per month) Wow, that was a nice increase.  Thanks, that's all I need."

Two weeks later a rejection letter comes from the nice man stating:  "Sorry, but we cannot accept your offer in compromise due to the high probability of future increases in income." 

Ok, you're the taxpayer negotiating your own offer.  What do you do now?