Here's a fact for you: the IRS Offer in Compromise program has helped tens of thousands of US taxpayers get out from under crippling tax debt. As a tax attorney, that's the kind of resolution that I like to see. Unfortunately, thanks to misinformation on late night TV ads, various internet websites and articles, and even the IRS, there's a whole host of myths floating around. While I can't undo a lot of the harm these myths have inflicted, I'm going to detail them in order to prevent any future harm. The following myths are some of the more dominant ones that my firm runs into on a daily basis.
1) The Offer in Compromise program is a scam
We'll start off with an easy one. This is simply not true! While there are certainly plenty of scam tax resolution companies who fail to get their clients relief, I can assure you that the IRS Offer in Compromise program is legitimate. Not only that, but it's a powerful tool that has helped so many people find their way out of otherwise overwhelming debt. It is of the utmost importance that we don't understate how much of a positive tool the program can be.
2) The IRS is willing to accept just 10% of the tax owed
This one chills me to the bone. The answer is pretty much a resounding no. If the IRS has accepted that little, I'm confident it was one or two isolated cases where people were able to settle for such a small percentage of the accrued debt. The standard formula for calculating an offer in compromise goes by something called Reasonable Collection Potential. But, while this formula gives a good starting point, it can be adjusted to suit particular situations. Please note the word "reasonable," as that's what an offer in compromise is. It's not a way to crush your tax bill into the dirt, but is instead a way to compromise in order to quickly resolve your debt.
While the IRS does — on rare occasions — accept these particularly low offers, more often than not, they demand much, much more. After some inter-firm debate, my team and I have come to the conclusion that the myth of the "10% offer in compromise" started because of junk mail flyers sent by scammy tax resolution companies. These are the kind of people who put in a proposed settlement of 10% in order to sell you on an unlikely dream. The hope is that you call them and hand over more of your money while they make offers that the IRS is not likely to accept. Not only that, but some of these low offers will do nothing more than tell the IRS you aren't taking your tax debt seriously.
3) The IRS Pre-Qualifier will tell you whether or not you should file an offer
False. The IRS Offer in Compromise Pre-Qualifier is either a) intentional propaganda to convince you to pay more than you should or b) incompetent buffoonery. Many of our accepted offers have later been run through the pre-qualifier only to find… drum roll please… that the pre-qualifier said NOT to submit an offer in compromise! Turns out the pre-qualifier isn't so accurate after all.
Get this metaphor: "Looking for the key to tax settlement?" BOOM!
4) File an offer as often as you want; there's no harm to be done
Filing numerous offers, especially ones that have no chance, is not a good idea. When an offer in compromise is submitted, the statute of limitations on collections is tolled, which means that it stops running. What many people don't know is that the IRS has a limited amount of time in which they are allowed to collect on back taxes. When you submit an offer, it can take a year or more to process. That year is a whole 365 days that won't be deducted from the expiration date of your debt. It's of the utmost importance that you are careful when submitting an offer in compromise; you should only file when you have a reasonable chance of your offer being accepted. While you might think it's a smart move to delay the IRS, you are only keeping them at bay until your situation might improve and require you to pay your debt in full.
5) The IRS Fresh Start Program didn't really affect offer acceptance
Actually, the IRS Fresh Start guidelines for the Offer in Compromise program are really favorable for taxpayers. We have been big fans of the new guidelines and hope that they spur further changes that can benefit taxpayers. But, as with everything the IRS does, these changes are complex. The new guidelines are only favorable if you know how to take advantage of them. If you don't, you're likely to either end up with an accepted offer that requires you to pay far too much or find yourself holding a rejected offer.
6) The offer in compromise is a great way to get back at the government
Well, perhaps. But, take a minute and ask yourself, who do you think is the biggest beneficiary of the IRS Offer in Compromise program? The answer is plain and simple – the IRS. Sure, they are acting like they care, and that's something they can use to try and pretend that they are on the side of taxpayers. But let's recall the statute of limitations we mentioned just a short while back. That statute is a law that binds the IRS, and there is nothing they can do about it. What they realized is that they can agree to take less now, and it could actually end up being more than what they would collect if they were to stick to the remaining collection period!
But, for a lot of taxpayers, paying more now makes more sense than paying less in the future. Having a tax debt hanging over your head can lessen your quality of life, and paying to get rid of the IRS's influence can be a rather worthwhile deal. Having the IRS waiting for you at every turn in your life is a surefire way to watch your future turn dark. What I love seeing is when an offer in compromise — or any other tax-fighting strategy we can come up with — is able to get you your future back.
Keep your head up, and if you need assistance, contact us for a free consultation. We can help you understand exactly what your issue is, and what you can do to solve it.