Taxation & Estate Planning

Is the IRS Pre-Disposed to Rejecting Your Offer In Compromise?

By Darrin Mish

By it's own reporting the Internal Revenue Service acceptance rate of Offers In Compromise has declined by a whopping 70% since 2001! Some critics voice the complaint that the IRS is not realistic in their assessment of taxpayer circumstances and accuse the service of routinely rejecting reasonable offers that are a good deal, not only for the taxpayer but for the IRS. The criticism is furthered by those that say the Offer In Compromise program helps the IRS collect monies it would otherwise not be able to collect and promotes the future compliance of the taxpayer making the "offer" by requiring that the taxpayer to file timely returns and pay taxes for the five years following offer acceptance at the risk of having the full liability reinstated.

Are these criticisms and complaints really valid though? There may be some merit to the argument that new policies and procedures put in place by the IRS have discouraged taxpayers from submitting acceptable offers. However, there is equal merit to the argument that before these policies and procedures were in place the IRS was inundated with frivolous "offers" by taxpayers and professionals representing those taxpayers. These frivolous offers were consuming time and resources the IRS could better apply elsewhere. Further these offers were considered frivolous because they were being made by taxpayers that could really afford to pay their tax bill but were trying to get by "on the cheap" and settle for "pennies on the dollar." Is it really fair for a taxpayer that owes the government $250,000 in back taxes, and owns a home with $500,000 in equity, to be offering the government $1000 to settle his tax bill?

Granted the previous example is a bit of hyperbole but you get the point. Taxpayers that enrich themselves by not paying their taxes should not be let off the hook for "pennies on the dollar" if they have resources to pay the bill. The operative word in the above qualification though is "if." The plain fact is the IRS continues to accept "properly" structured Offers In Compromise when it receives them. Even if an OIC is rejected upon initial submission it will more often than not be accepted on appeal if it is "properly" structured and justified by the taxpayer's circumstances. Our firm had a consultation recently with a taxpayer that was firmly set on the cockamamie idea of filing an "offer" with the IRS to settle his $100,000 plus tax liability by "allowing" them to keep his 2007 tax refund of some $700 and change. We tried to gently inform the gentleman that the IRS was going to keep his refund and apply it directly to his outstanding liability regardless of his "offer". We are still not certain this guy actually got the picture.

Can you still successfully make an Offer In Compromise to the IRS and settle your tax bill for "pennies on the dollar"? Yes, absolutely, unequivocally, we help taxpayers accomplish that task many many times each year. Will the IRS accept your OIC? The plain truth is an OIC is not appropriate for every taxpayer's situation. There are other options available to you for settling your tax debt for less than you owe. Some of those options are quicker and more effective than an OIC and can even save you more money. It's true! Believe it or not there is more than one viable solution to any given tax problem. An experienced tax professional can help you properly structure a solution that will minimize your headaches and get the tax man off your back.

Full post as published by IRS Problem Solver Blog on July 24, 2008 (boomark / email).