Say you've just received a letter informing you that you're under investigation, or under audit. You're not going to feel good about that. Many people know they have tax issues, but there is something about receiving that letter that makes it feel like the final nail in the coffin. Like they have no way out. One thing we've learned – there is always hope. No matter how dreary the situation seems.
Having questions is normal
Many of the clients who come to our office are scared and unsure of how to proceed. They've just been contacted by one of the most powerful organizations in history and they want to know if we can help them. One of the most common questions we hear from prospective clients is simply, "Do I qualify for an IRS Offer in Compromise?" Other individuals are suspicious, and with the litany of scam resolution companies out there, you can't blame them for their apprehension.
Here's the thing, proper representation exists and an offer in compromise can be an incredible way to make an overwhelming tax debt a lot more manageable. The IRS Offer in Compromise Program is not a scam and I've personally been involved in hundreds of accepted offers to prove it. This brings us to the question, "What amount can you settle my back taxes for with an offer in compromise?" And that is definitely a question worth answering.
What percentage can an IRS offer in compromise reduce your taxes by?
Trick question. There is no set percentage for settling an IRS tax debt with an offer in compromise. In the simplest terms, an IRS offer in compromise will be approved when what you can actually afford to pay is less than what you owe. There is no 10% rule, regardless of what many junk mailers like to claim. In theory, if all you could afford to pay the IRS is $10,000, it wouldn't matter if you owed $100,000 or $1,000,000, as your offer in compromise amount would be $10,000. And if you only owed the IRS $10,000, you would be paying them in full.
So, an offer in compromise is not determined by a set percentage, but it instead based on what your reasonable collection potential (RCP) is. Your reasonable collection potential is determined by setting your assets and income against your allowable expenses. This helps the IRS determine what you are capable of paying instead of them just accepting an offer that is only beneficial to you. Unfortunately for taxpayers everywhere, the IRS is not in the business of handing out free passes. When it comes to offer in compromises, you need to findi the expenses that apply to you and are deemed "acceptable" by the IRS. You then need to use them to arrive at an amount that gets the IRS out of your life and allows you a solid financial future.
Is my reasonable collection potential low enough to get an IRS offer in compromise accepted?
This reminds me of a conversation I had last week with a personal injury attorney based out of Connecticut, Richard Hastings, Esq. He mentioned that he often talks to a potential client over the phone, usually someone who was just in a car accident. It doesn't take long before he's asked the age-old question, "What's my claim worth?" He told me that the way he handles this question is by saying, "Sure, I will tell you what your claim is worth if you can answer my next question." Then Attorney Hastings asks, "What do you think of my tie?" The client always answers the same way, "Well, I can't see it, so I don't know." Attorney Hastings then goes on to say, "Well it's like that – I can't see your entire case right now. Only when we are nearly complete with our work will we really know what we are dealing with. I can't tell you what your case is worth as there are too many factors to give an accurate range. But you do have a claim worth pursing, I can tell you that."
For us, the situation is nearly identical. We can't give an accurate range of what we can settle an IRS tax debt for until we are get a full picture of your financial picture. Income, assets, expenses, etc. But, we can recognize when we have a situation where a client needs our help.
How to get the wrong answer
I can tell you one way to find out what the wrong answer is. The IRS has released a new "easy-to-use" offer in compromise "pre-qualifer" calculator. Just to see how it worked, we ran through some of our real-life offers that had been accepted. The pre-qualifier claimed that some of our clients didn't qualify, even though they had most certainly qualified and had their offers accepted. Not only that, but the pre-qualifier also claimed that certain clients qualified when — in actuality — their offers had been rejected! It sounds wild, but you better believe that we have the paperwork to prove it. Clearly you should have quite a few reservations on trusting your future with such a faulty tool.
We've covered this topic on IRSMedic before. Offer in compromise calculators are useless. It takes expertise, time, and hard work to arrive at a number that meets both the demands of the IRS and still maintains the ability to give you a bright forecast for your financial future.
While I find the IRS's pre-qualifier is extra-absurd, it is rather ingenious. What if hyper-advertiser GEICO had a web page: "Personal injury claims pre-qualifier"? How many people would use their answer as a guide?
So, when a government organization like the IRS — which most people would expect to be trusted — puts up a faulty tool and claims it to be accurate, it's tough to blame anyone for falling into that trap. Please be aware that the details of what qualifies you for an offer in compromise and your reasonable collection potential are much more nuanced than what you can put into a calculator.
We've dedicated our lives to helping people find the accurate answers to their reasonable collection potential and what they can expect to pay. Don't hesitate to reach out and share the details of your situation with us. Working out the answers to these question is the way to ending the IRS involvement in your life.