I sometimes hear from clients looking to settle their tax debts and have received incorrect advice regarding when and how to file an Offer In Compromise (OIC) from an IRS collection agent, their accountant, lawyer, or a friend, only to have their offer rejected.
What should I seek from an individual advising me to file an OIC?
For starters, I would ensure they are competent in what they are talking about.
Most IRS agents neither have expertise in how to investigate an offer in compromise properly nor do they have a say in the decision to accept or reject them. The only IRS agent trained to compromise your taxes is an OIC investigator. Yet many people, unfortunately, deal with IRS Collection Agents either consisting of an IRS Revenue Officer or an Automated Collection Services (ACS) representative –neither of which is usually qualified to give you any substantive offer in compromise advice. Their primary function is to collect taxes and not to compromise.
IRS collection agents are not trained to investigate an offer in compromise. Their primary function is to collect taxes from you, not how to compromise. Due to a lack of training in this area, they are not tasked to investigate OICs and do not have a say in the decision to accept or reject them. Therefore, IRS Revenue Officers and ACS representatives have very little to do with your OIC, and reliance on their advice in this area is not wise.
Even though either of these individuals may be acting in good faith to help you, your chances of getting approved without a complete investigation of your case are greatly diminished.
So, you may be wondering why would any of these individuals provide advice on this, to begin with. Simple, this advice could be a way to move your file off their desk, making their workflow and case inventory look ideal. Once this election is made, the file will no longer belong to them, and it could take up to 12 months before the OIC decision is rendered. Also, filing for an OIC tolls any collection efforts as well. Hence, the IRS Officer or ACS Representative will no longer have to deal with you. There are many reasons that seem in your favor but are not in favor of the IRS revenue agent.
OIC involves IRS rules and not accounting rules. Unless your accountant is well versed in this, which very few are, they may not be able to offer prudent advice on this. This is also the case for attorneys who do not specialize in this area of IRS tax.
The IRS follows the Internal Revenue Manuel for making its determinations on OIC. There is a complete section dedicated to it.
The Internal Revenue Manual's rules on a compromise include:
- Calculate and reduce the equity in your house, car, and household belongings using their quick sale value.
- The IRS uses conditional and necessary living expense allowances to oversee your lifestyle and spending.
- Reducing the value of business assets.
- Documentation and rules on how to value retirement accounts.
- Review and valuation of bank account balances.
- How to calculate the net realizable equity and reduce the value of your property.
- Documenting your wages, mortgages, car loans, student loans, and divorce obligations.
- Exemptions in your property allow you to protect it from the IRS.
- Allocating shared expenses and a non-liable partner's income so that person does not pay your IRS debt.
- Formulas to calculate your future earnings and ability to pay the IRS until their collection statute expires.
- The Collection Expiration Statute Dates on balances
The IRS rules, formulas, and calculations are designed to make an OIC harder, not easier. Lack of familiarity can result in you paying the IRS more to settle than you should or having your offer rejected.
Unless one has done a complete inventory of your assets, debts, income, and living expenses, they are not feasibly able to provide advice. One must submit this information to the IRS for them to apply their formulas and calculations.
The IRS makes its decision strictly based on fitting your finances into the rules contained in the Internal Revenue Manual. Our goal is to be able to show (1) equity in your assets (per IRS formulas) and (2) the amount you can pay the IRS over up to 10 years in an installment agreement (according to IRS calculations) to be less than your tax debt. If so, then an OIC could be for you.
It is prudent not to take advice to file an OIC from someone who does fully know the ins and outs of the Internal Revenue Manual and has not provided their calculation to you based on an actual thorough review of your sources of income, and living expenses, property ownership, and liabilities.
Unless someone has done a detailed analysis, it is unlikely they could give you sound advice on whether to proceed.
Success with an offer in compromise does not come down to chance. It all comes down to how your reported finances fall within the government formulas and calculations. Because of how this is reported to IRS, only about 35% of all offers get accepted by the IRS. Make sure with certainty that the information reported to IRS is done by a knowledgeable tax professional who deals directly in the OIC area and is advocating for you versus someone who is either not on your side or does not have actual hands-on knowledge in this field. Choosing who helps you could go a long way in helping you get the relief you seek.