Taxation & Estate Planning

When is the best time to file an offer in compromise?

By Howard S. Levy, Esq.

In the back of your mind, a question lingers:  When is the best time to file an offer in compromise?

You are right to wonder.

The timing of your filing can make a big difference to the outcome.

Before jumping in, here is what you should know about the best and worst time to file an offer in compromise:

Now may be the best time to file an offer in compromise if:

• If your earnings are at a low point, and will likely stay there for the next 12 months.

If the IRS sees your income heading up while they are looking at your offer, so could your settlement.  It can take the IRS at least 12 months to investigate an offer in compromise.

Your earnings can have an impact on the amount of your settlement.  The IRS offer in compromise formula studies what you make and spend.  The IRS will be looking at your budget, and how much money you have left every month after paying necessary living expenses.

If your income is going up, the amount of money you have left at the end of the month could be, too.  The more you have left at the end of the month, the higher your offer in compromise.

Waiting for your income to recover to file an offer in compromise could cost you more to settle.

For example, an increase of $1,000/month in what you have left every month would cost you up to $24,000 more to the IRS (using the maximum amount of time the IRS allows to pay the settlement).

If you think your earnings could change, don’t wait to file an offer in compromise.  Get that compromise filed and investigated when your qualifications can be maximized.

• You are considering acquiring property of value that will increase your net worth.

In addition to your earnings and expenses, the IRS will investigate your assets and what they are worth.  The equity in your property – house, cars, retirement accounts, savings – will be added to the settlement amount.  The IRS defines equity as the fair market value of your property, less any debt (mortgage, car loan).  For some assets, likes houses and cars, the IRS will reduce the fair market value by 20% to calculate equity.

For example, don’t put your name on a house that your significant other is buying with their money until you complete your offer in compromise.  Once  your name is on the deed, presume your portion of the equity will be included in your settlement.

Now is not the time to start a retirement account. The IRS includes most retirement accounts in their settlement calculations.

Let the dust clear first, get your offer in compromise through, then move on with the life you want.

• The IRS is threatening seizure of your property, and you want to stop them and settle.

You could have an IRS Revenue Officer assigned to your file getting ready to seize and sell your house. Or maybe the IRS is threatening a levy on your paycheck.  Either way, you would rather settle than have the IRS clean you out.

An offer in compromise can be an effective method to have the IRS stop a seizure or release a levy.  Simply put, an offer in compromise stops the IRS from sending out levies.  While your compromise is being investigated, the IRS cannot start action to take your house, wages, bank accounts, etc.  Internal Revenue Code 6331(k) and Internal Revenue Manual 5.17.3.4.5 requires the IRS to stop in their tracks while they are investigating a compromise.

The IRS hammer is neutralized during the entire time an offer in compromise is investigated, which you can expect to be a minimum of 12 months.

On the other hand, now is the worst time to file an offer in compromise if the IRS is running out of time to collect your taxes.

The IRS gets 10 years to collect taxes from you.  This is known as the statute of limitations on collection, and can be found in Internal Revenue Code 6502 and Internal Revenue Manual 5.1.19.3.4.

After the 10 years expires, the IRS must forgive your tax debt, and clear your balance to zero.

But an offer in compromise stops the running on the IRS statute of limitations on collection.  And remember, an offer takes a minimum of 12 months to be investigated, often more.  And if your offer is rejected, you have appeal rights which can take another six months.

During this entire time – while you offer is pending and appealed (if necessary) – you are making no movement on the IRS statute of limitations.

And if your compromise is rejected, the IRS gets to add the 12 months it was investigated to your collection end date.  In other words, if your compromise fails, you will have lost not just the settlement but time.

Think of the statute of limitations on collection as a form of settlement. After all, when the 10 years is over, the IRS forgives your taxes, just like they would do in an offer in compromise.  Filing an offer when time is running out is likely not in your best interest, and can make matters worse.

You may feel yourself chomping at the bit to get your compromise filed and settle up with the IRS.  But it is important to look before you leap.  Waiting to file a compromise after your finances have made a turn for the better can increase the amount of your settlement.  If the IRS has a short time left to collect, it may be best to avoid filing an offer in compromise, and let the statute of limitations on collection run out.  Filing a compromise at the right time should be part of any strategy to settle with the IRS.

The post When is the best time to file an offer in compromise? appeared first on Cincinnati IRS Tax Attorney Howard Levy.

Full post as published by IRS and the Law on June 26, 2020 (boomark / email).