If you owe more in unpaid taxes than you could ever realistically pay back, you may be able to qualify for an “offer in compromise” (OIC). However, many offers that are submitted to the IRS are rejected, for a variety of reasons. Avoiding the pitfalls in the process of requesting an offer in compromise can save you time and money. Here are ten mindsets and behaviors you can STOP doing to vastly improve your chances of getting your OIC accepted:
1. Don't Continue to Accumulate More Tax Debt While Your Offer Is Pending
A typical offer in compromise candidate waits 6-12 months just for the IRS to process the request. The IRS hates it when offer candidates continue to add more and more to their bill each year. They call this phenomenon ‘pyramiding.' I have seen good offers wrecked after waiting nearly a year for their turn to come up in line because the taxpayer failed to make his quarterly estimated payments while the offer is pending. You have to stay current in filing and paying while your offer is pending. Now is as good a time as any to get in the habit of filing and paying on time.
2. Don't Fail to File or Pay Your Taxes For Five Years Following Acceptance of Your Offer
You must pay and file your taxes on time for the 5 years following an acceptance of your offer in compromise. If you don't, all the forgiven tax debt will come rolling back on top of you, along with penalties and interest. There is nothing more tragic than a taxpayer failing to file in year 4 and seeing thousands of dollars being added back to their tax bill.
3. Don't Fail to Appeal the Denial of a Good Offer
The collection appeals program can be a game changer for otherwise good offers. Most taxpayers don't know they can appeal an offer denial. Even fewer know how to appeal the denial. It never hurts to have a fresh set of eyes on your offer, and that's what you get when you appeal it to the next level. On average, only about a third of offers get accepted. I think this low number is a result of taxpayer's lack of knowledge of the appeals program. Tax professionals should have much higher success rates than the general average. So, ask any tax professional you are considering to help you what their success rate is.
4. Don't Take an Offer Examiner's Suggestion to Withdraw a Good OIC
An offer examiner is required to explore the IRS' collection alternative of choice—the installment agreement&mdsah;if it denies your offer in compromise. So, don't get pressured from the beginning into a one-sized fits all payment plan, if you have a good offer.
5. Don't Submit “Junk” Offers
Many taxpayers mistakenly believe that the IRS has no staying power and will bend to cut you a deal just because the government generally runs on huge deficits and massive spending. In other words, these taxpayers think that they can make a lowball offer with no basis in reality. An offer in compromise is simple in concept, but you must have supporting documentation for all your figures. Simply put, an offer is the amount of your disposable income (that is, income minus allowable expenses) times 12 months. You can't just write down an amount grandma might lend you to get out of paying your taxes. These junk offers with no supporting logic or documentation will be rejected. You also will lose the mandatory 20% of your offer that you are required to pay with your request. If you later submit a legitimate offer, you must submit a new 20% down payment.
6. Don't Reject Alternatives If a Successful Offer is Unlikely
The offer in compromise is a powerful tool in collection alternatives, but it's not the only show in town. Don't go down with a sinking ship offer without exploring a payment plan if your offer is looking like it won't be accepted, e.g. you have too much equity in your house or other disposable assets. Remember, the collection statute of limitations stops while your offer is pending. So, you may not wish to stop the collection statute if it is short. The IRS has an often overlooked program called the Partial Pay Installment (PPIA) that accomplishes nearly the same thing an OIC does if you are not approved for the offer. If the amount you can pay is less than the IRS can collect within its collection statute of limitations, the rest is on them.
7. Don't Wait Until Things Get Better
It's counterintuitive, but the best time to make a settlement deal is not when things are at their best financially. That said, the offer rules changed in 2012, and the offer game clearly favors taxpayers with some amount of monthly disposable income. They are going to make you pay the equivalent of 1 year's disposable income as your offer amount if you agree to pay your accepted offer amount in 5 months or less. If you are going to pay in 6-24 months (24 months is the max for offer payouts now), the IRS is going to look ahead at 2 years of disposable income. So, if that 1 or 2 year look-ahead period is bleak for you financially, and it won't full-pay your debt, you have a pretty good shot at getting an offer approved. These developments are getting more offers approved than ever before. These deals won't be around forever. The IRS loves to “improve” on systems and procedures almost daily, where no improvement is necessary (or desired). There is no guarantee that this workable system will be around forever. Some of its current components are already set to expire soon.
8. Don't Do it Yourself
The DIY approach may be good for things like home improvement, but not the offer in compromise process. As mentioned in this article, the IRS' offer examiners are trained to look out for the best interests of the government. Who is the government? Just know, it's not you! If you are able to pay your tax debt with available cash or assets, they will want you to sell property, cash out or get in a payment plan to pay out the bill. The IRS will pressure you into these options, but a knowledgable and experienced tax attorney that deals with the IRS everyday is not intimidated by these tactics.
9. Don't Sweeten the IRS' Pot with a Collateral Agreement
The IRS will rarely tell you about this little known weapon in the offer process. Often during the offer process, an examiner will bring up certain contingencies that they say will kill the deal. I call these “dream scenarios,” as in “Keep dreaming!” It goes like this: We (the IRS) think that this able bodied taxpayer will be able to make $75,000 next year and so the amount of his offer should be at least $75,000. Never mind that he owes $80,000 for multiple tax years and has never made $75,000 in his life. So, you can come up with a side agreement with the IRS that says that IF you make above what you made last year, let's say $35,000 for instance, you will pay the IRS $1 for each $5 above $35,000. They may still say no deal. So, you come back and say … oh, AND we won't take any business deductions next year BUT give me the offer I request. In essence, you are putting your money where their mouth is. You are making it more attractive for the government to say yes to your offer and it is bringing these remote contingencies they like to bring up into perspective.
10. Don't Be Rude and Inflexible Toward Your Offer Examiner
A lot of human elements go into the consideration process of an offer in compromise. As in most things in life, you get more with honey than vinegar. Plainly, if an IRS examiner doesn't like you, he is not going to give you any benefit of the doubt on close calls. Offer examiners are usually trained tax professionals, unlike some of the IRS employees you get when you contact the general Automated Collection Services helpline. Generally, they will be courteous, professional, and even cooperative when it comes to giving you time to round up additional documentation, since the IRS takes a long time just to process your offer. Some will even come up with creative solutions in the process, if they know that you will politely stand your ground and are being straight with them. However, if you get frustrated or lose your cool or treat them as less than trained professionals, they lose their flexibility toward your offer.
Do Let an Experienced Tax Attorney Handle Your Offer in Compromise
Whether your considering taking the first step to resolving your outstanding tax liabililty or have applied and been rejected in the past, having the right tax attorney on your side can make a difference. If you want to learn more about whether you may be a good candidate for the Offer in Compromise program, contact the Law Offices of Travis Watkins today at (405) 703-5689. We have offices in Oklahoma City, Tulsa, Norman, and Dallas, Texas, and are proud to serve citizens throughout Oklahoma and Texas. Call us today to get started!