What is an offer in compromise, and how do you get one approved? The IRS defines it as a tool that “allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship.”
When the IRS reviews your case to determine if they are willing to accept your offer, they will take the following factors into consideration: your ability to pay, your income, your expenses, and your asset equity. Bear in mind that as much as we bash the IRS, they are extremely thorough. If you’re considering dissipating assets to try to ‘hide’ your money (i.e. gifting $100,000 to your cat, Barney), the IRS will most likely catch you. As a matter of fact, they’ll search back the past 10 years to see if you withdrew funds or liquidated accounts to pay for something that wasn’t a necessary living expense.
First steps towards offer in compromise success
The first step you’ll want to take is to make sure that you’re eligible to apply; there are a few reasons why you may not be, including if you have recently filed for bankruptcy. What we don’t recommend is using the ‘pre-qualifier tool’ on the IRS's website. We have actually had offers that were accepted, yet when we plug all the information into the pre-qualifier, they are rejected! Not only that, but if an IRS agent that you’re dealing with tells you, “Hey, you should apply for an offer in compromise," remember that a different agent will actually be reviewing your case; there is no guarantee it will be approved just because an IRS Agent recommended the program to you. They may have just wanted to move your case off of their desk.
The IRS makes it sound as if it’s really quite simple after that – just “submit your offer and then select a payment option (lump sum or periodic payment)!” But I think at this point we all know that dealing with the IRS isn’t something you would necessarily call 'easy.'
There are several reasons why your offer may be rejected:
- You aren’t current – This is the first thing we ask clients when starting the process of resolving a tax problem.
- You didn’t substantiate your offer – Always provide evidence to support your offer; tell your whole story!
- You didn’t fight the IRS’s claims – They can make mistakes too!
- If you had a dissipated asset in the past 10 years – You can’t “out IRS the IRS.”
- You didn’t appeal – It’s always worth a shot to have a fresh set of eyes look at your case (if you miss an estimated tax payment during consideration, your offer will be rejected and you cannot appeal!).
- Your submission isn't reasonable based on your ability to pay.
With the right tools and team behind you, you can certainly be approved. Once you're in the door, don't think it's all smooth sailing; it's important to keep in mind that offer in compromises can default! One of the requirements is that you do not incur any additional tax liabilities and you stay in compliance with the tax code. If you need assistance with your Offer in Compromise, contact us. We can help.
Offer in compromise myths that may hinder your success
In this episode of our podcast, Parental Advisory, Anthony and I discuss some wide-spread myths surrounding the Offer in Compromise Program: