An estimated 75% of all offer in compromises submitted to the IRS are rejected. This is bad news for the approximately one million Americans buried in IRS debt. But, know that the chances of an accepted offer are significantly higher when you take the time to create a reasonable offer that the IRS can't help but consider. Many of the offers that are rejected simply don't take necessary factors into account and therefore give the IRS a number that they have almost no chance of actually accepting.
An offer in compromise can be a powerful tool for whittling down your tax debt to something manageable. But it also requires some fancy footwork to find the perfect number at the intersection of what you can pay, the lowest amount the IRS will accept, and what your particular situation and circumstances add to the equation. Even if you've had an offer rejected in the past, that doesn't mean that it's not still possible to have one accepted.
A man and his rejected offer
A man we'll call Michael Sanders came in to see us a few years back. He had just received a rejection notice from the IRS about a recent offer in compromise he had submitted. He told me that his long-time CPA friend had helped him come up with an offer to settle his tax debt with the IRS. I took a look at what they had submitted and what the IRS Offer in Compromise Examiner's position was.
Mike had a cleaning business with 40 employees that did fairly well. Unfortunately, things at home weren't going quite so smoothly:
"My wife went crazy in 2006. She went on spending binges that I couldn't control. I tried to get her help and she just got really sick mentally. She then had an affair with a younger man she met at Narcotics Anonymous. I thought I needed to stick it out and help her as much as I could. At least for the kids' sake. But she was actually the one who filed for divorced in 2008. I didn't put up much of a fight. I just feel she lost her mind. I feel worse for my kids who lost their mother. She's just not the same woman anymore.
But I ended up losing everything, including my 4,000 square foot home on the Connecticut River that was paid for. I took the kids and we moved into a rental in Middletown. I lost my business and stopped making payroll deposits. The IRS hit me with a $250,000 tax bill. My friend, Charlie, a CPA in Glastonbury, started helping me with this problem when it happened, but we haven't made much progress in 4 years and now there is this – the second rejection of an offer in compromise. I don't know what to do because I can't pay this and it is stressing me the freak out."
This was quite a story, but not all that odd for someone with a tax problem. I took a look at Mike's finances to see what factors could have had and impact on his rejected offer. While he wasn't making the money he used to, he had gotten a job managing a large cleaning business for a former competitor and made around $150,000 a year. His four kids lived with him, his rent was modest, and yet he had nothing left after paying for his ex-wife's care and her house where the kids would visit on assigned weekends.
Why was Mike's offer rejected?
I could see from the very start that there was no way the submitted offer in compromise would be accepted. When submitting an offer in compromise, it's important to know your Reasonable Collection Potential (RCP). This amount — which lays out what the IRS expects to collect from you according to the factors of your situation — comes from your income/assets set against your necessary expenditures.
The reason Mike's offer was rejected was straightforward – the IRS was not giving him any credit for the money he was spending supporting his ex-wife. For all they knew, it was just money he was trying to keep for himself. I told Mike he could appeal his rejected offer, but the appeal would likely be rejected as well.
The problem at hand: The IRS was not allowing Mike to expense the money he was informally giving to his ex-wife for child support/alimony.
The first thing I told Mike was that he needed to get an alimony order from family court. This was the only way that the IRS was going to allow these expenses and accept his offer. By not having the proper documentation, Mike was ineligible for being able to claim a very real and very necessary expense. We had to fix that as soon as possible.
Upon hiring our firm — on the condition that I call Charlie, his CPA, and tell him that Mike would be working with us from now on — we were ready to get things rolling. I called Charlie, who admitted to me that he was relieved to hand the case over. He said that he hates doing tax resolution work and was doing it as a favor to Mike, but this case had been keeping him up at nights. I told him our new strategy — get the proper documentation in order to claim the expenses and then submit an adjusted offer — and he told us how happy he was that we would be representing Mike. We were going to help Mike erase his tax problem.
Our Strategy
First things first, we needed to withdraw the rejected offer (always withdraw an offer if it doesn't stand a chance). We re-allocated Mike's finances and I found a family law attorney to file for an alimony order to officially show that Mike had payments going to his ex-wife. Luckily, seeing as this was an old tax liability, we didn't have to worry about submitting an offer in compromise for the current tax year.
We resubmitted a new offer six months later in the amount of $32,000 (the money coming in part from his brothers, but mostly an old 401(k)). With our offer, we were expecting that we might have to appeal a denial. Much to our excitement, the first Offer in Compromise Examiner we negotiated with accepted our offer. As a condition, however, she did require that Mike come up with his offer amount, $32,000, immediately. He had no problem with this as he just wanted to get his IRS problem behind him as quickly as possible.
What else could Mike have done?
The most important takeaway from Mike's situation is that tax law is incredibly complex. A single piece of paper (the alimony order) was keeping Mike from a reasonable settlement with the IRS. Every case is different, but there are almost always a few nuances that either make or break an offer. Making sure that these little caveats are sorted is what a good attorney will do for you. In Mike's case, because these were payroll taxes, bankruptcy was not an option. Finding a reasonable offer was the best way for Mike to get rid of IRS involvement in his life and move towards a really bright future.
If you find yourself in a situation where you just don't know what to do, know that help is available. Dealing with the IRS can be a major headache, and it's something that most taxpayers feel they have to suffer through alone. This is not the case. There are always options, and finding the best ones for you can be the difference between whittling down a tax debt over the next decade and putting the IRS in your rear-view mirror as soon as possible. Don't ever feel like you're alone.
Contact us for help. Call us at 888-727-8796 or email info@irsmedic.com.
