The IRS Rejected Your Offer in Compromise - HELP!

An IRS Offer in Compromise is a great tool available to some taxpayers, allowing them to pay the IRS back less than the full amount they owe. Sounds great.

 

You heard the commercials on the radio and on TV - XXX National Tax Relief Firm can reduce your taxes! Call now and take advantage of the IRS Fresh Star Initiative! (Author's note here - I probable hear more commercials for IRS tax relief on my satellite radio since I specialize in IRS Offers in Compromise and Audit Representation and many of my internet searches is on these tax related topics. I now fully appreciate the phrase "app would like to share your information to make your experience more enjoyable").

 

The Fresh Start Initiative is approaching middle age and the IRS financial standards are just not keeping up with our current national financial situation, or even that here in the Austin/Round Rock area where rents are up, and home prices are falling.

 

By way of background, please visit my deeper dive on IRSOffers in Compromise on my website.

 

So, what to do? An Offer in Compromise is just that, an offer. The IRS may have rejected it, but you still could make an additional offer, or failing that, to appeal the finding of the IRS.

 

First, let us understand what happens when the IRS evaluates your offer in compromise. The Internal Revenue Collection Manual, Part 5, Chapter 8 sets forth elaborate procedures IRS personnel must follow in evaluating your offer. The IRS starts with the information you provide - that you are required to provide - as part of your submission. The key sub-chapters are 4 (Investigations) and 5 (Financial Analysis). The OIC program is not a giveaway program. Remarkably like a mortgage loan application, the IRS is going to review your documents, using all kinds of tools and procedures to evaluate your financial situation and your ability to pay. The IRS is evaluating how your financial situation matches up to the IRS national and local standards.

 

The OIC is your opportunity to tell your story. Many OIC's fail because taxpayer's fail to tell their story by failing to provide the level of detail that a successful OIC requires. I also believe that many taxpayers go into this program with unrealistic expectations. If you live in a large house with a large mortgage or a large value and have large lease payments on luxury cars, country club membership and Netflix, HBOMax, Disney +++, Amazon Prime, etc., you are not going to qualify for an OIC.

 

My experience and approach with OIC preparation is like my approach for an IRS audit - prepare, document, compile your data in an easy-to-read format, analyze the data and let the IRS know about your analysis and how you arrived at your conclusion. This procedure is no different than a lawyer presenting his case in support of his motion or an appeal. You are not going to win without any evidence. OIC submissions fail because they have not properly prepared, or the client has not been properly advised, or they failed to gather and organize their evidence.

 

I prepare your evidence in best light for you the taxpayer. For example, the IRS is going to evaluate the value of any asset you list on your submission, your home for example. They have sophisticated tools to evaluate the value. Putting your best foot forward on this issue may require documenting via whatever means possible the repairs needed on your home; revealing an equitable claim on your title that someone may have (thus reducing the value of your interest in the property). Sometimes the IRS analysis fails to account for selling expenses. My experience evaluating residential appraisals allows me to peek behind the curtain and evaluate the accuracy of the IRS' position. Yes, it is a lot of trouble, but it is necessary to get the result you seek.

I approach your monthly expenses in the same way. The National and Local standards just do not match up to the actual price taxpayers are paying now for gas, groceries and other normal household expenses. Fortunately, the IRS Collection Manual, Part 5, Chapter 15, Subchapter 1.8(6) provides:

 

National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer's basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.

Note: If the taxpayer or the IRS believes reviewing the last three months of expenses are not reflective of the actual yearly expenditures, additional months, up to one year, may be reviewed.

 

The IRS is giving you the opportunity, in fact inviting you, to challenge their numbers so that they can reach an accurate number. Again, keep in mind that you must be responsible in this approach – excessive entertainment and other expenses are not going to pass here.

 

Finally, even if you can not reach an agreement with the IRS on an OIC, I recommend that you take two additional steps to help mitigate your tax situation – (1) make sure your withholding covers the amount of taxes due in the current and future years so that you are not adding to your tax debt; and (2) file all of your returns on time.