Unlocking the Secrets of an Offer in Compromise: A Comprehensive Guide Chapter 2
OFFER IN COMPROMISE: THE PROCESS FOR
MAKING AN OFFER
“… (the IRS) OIC program that is itself full of compromises, as the
needs of the tax system as a whole are balanced against the needs of the
individual taxpayers.” Professor Bryan Camp, Lessons From the Tax Court: The
Concept of Reasonable Collection Potential, August 16, 2021.
General
Overview
Prior to getting
too far into the weeds here, you as the taxpayer should keep in mind that an
Offer in Compromise is not the only way to resolve your tax debt. An Enrolled
Agent, taking all the factors into account, can assist you with alternatives.
Going through the OIC, even if the offer is not accepted, can identify other potential
avenues for resolution. An Enrolled Agent specializes in this role.
The process of
submitting an Offer in Compromise (OIC) to the IRS can be complex and
time-consuming. Here is a general overview of the process:
·
Gather required documentation: Before
submitting your OIC, you will need to gather and provide detailed financial
information and supporting documentation, such as tax returns, pay stubs, and
bills.
·
Determine eligibility: The first step is
to determine if you are eligible for an OIC. The IRS will consider your income,
expenses, assets, and future earning potential to determine if paying your tax
debt in full would cause undue financial hardship.
·
Process your information: I will take
your information, analyze it, and prepare a monthly income and expense
statement for you that is representative of your typical monthly situation.
·
Submit the OIC: You will need to submit
the OIC along with the required documentation and the appropriate application
fee.
·
Review by the IRS and Verification of Assets
and Income: After receiving your OIC, the IRS will review your
application and the supporting documentation. They may also request additional
information or documentation during the review process. The IRS will check your
financial information and may investigate to verify the accuracy of your
financial situation and assets. This is where the IRS will decide as to your
Reasonable Collection Potential (RCP).
·
Counteroffer or acceptance: After
reviewing your OIC, the IRS may make a counteroffer or accept the offer as
submitted. If your OIC is accepted, you will need to submit the required
payment and comply with all terms of the agreement. If your OIC is not
accepted, you will be notified of the decision and given the option to appeal
or submit a new OIC.
·
Compliance: Once the OIC is accepted,
it is important to comply with the terms of the agreement, including making
payments on time and filing all required tax returns. Failure to comply with
the terms of the agreement may result in the OIC being defaulted and the
taxpayer being back to the original tax debt.
It's worth
noting that the OIC process can be lengthy and may take several months to
complete. It's also important to keep in mind that the IRS receives a high
volume of OIC requests, and acceptance is not guaranteed. If your OIC is not
accepted, you may be able to reapply or consider other options to resolve your
tax debt.
IN MORE DETAIL
Gather
Required Documentation
Your likelihood
of the IRS accepting your OIC is directly tied to the quality and accuracy of
the information you gather. Let me reinforce this statement – The better job
you do of telling your financial story to the IRS, the better the chances that
the IRS will approve your OIC.
The IRS approved
25%-35% of the OIC it receives. The vast majority of rejections are due to a
lack of information provided by the taxpayer to the IRS. In other words, they
did not do a good job of telling their story.
Having quality
information available at the outset of the process, and updating that
information on a regular monthly basis has numerous advantages. First, it gives
the tax professional an idea of what they have to work with and what the best
course of action to solve your tax situation is in the most palatable way
possible. An Enrolled Agent can usually tell right away whether your dollars
are best spent pursuing an OIC, or perhaps better spent pursuing another
settlement option.
The IRS does
have a Pre-qualifier tool that will give you the raw numbers on eligibility. It
won’t give you the insight of an Enrolled Agent, who may see your figures and
know that how those figures are presented may lead to a successful offer.
Remember, we are
telling a financial story, and we’re using your data to illustrate that story.
Having a complete financial picture allows the EA to go beyond the numbers and
look at trends.
The general
classes of information to gather are:
1. Income
statements
2. Expense
records
3. Bank
Statements
4. Credit
Card Statements
5. Loan/Mortgage
Statements
6. Asset
documentation
7. Documentation
of any large expenses
8. Tax
returns
9. Financial
statements
10. Proof
of payment of outstanding taxes
11. Explanation
of their inability to pay the full amount owed.
12. Explanation
of any reason supporting any claim of Doubt as to Liability.
Once you have
gathered this information, it is extremely important to update your information
monthly. This will make your life easier and allow your Enrolled Agent to spend
more time on presentation, rather than trying to play catch-up.
Another key
point here – Yes, we are telling your financial story in the best possible
light for you. But we are also playing to an audience of one – the IRS
settlement officer. While they will follow their IRS manual, positive exchange
with the Settlement Offer provides valuable insights as to how they look at
your case and where you need to bolster your information. As critical,
establishing a satisfactory level of communication with the Settlement Officer
may provide a viable settlement alternative to an OIC that will ultimately be
turned down. This feedback is critical to the success of your case.
Your documentation
is the backbone of your OIC. It tells your story. This is not the area to shortchange
on effort.
Determine Preliminary
Eligibility
Once you’ve
gathered all of the requested financial information, I will make a preliminary
determination as to eligibility. I may or may not use the pre-qualification
calculator. I prefer to use a spreadsheet, formulating my presentation for
items that may be out of the box – something the pre-qualification calculator
can not factor into your numbers.
If I see that
the numbers for an OIC just won’t work, I will review my findings with you and
we will formulate an alternative plan. For the record, if you have a large monthly
salary, drive later model cars with high payments, a large house with a large
mortgage, lots of streaming services, private school, etc. – you are not going
to qualify.
I will evaluate
two other critical factors at this point – (1) are you up to date on your tax
filings?; and (2) are you having enough withheld/paying in so that this problem
does not continue to grow? Remember, the IRS is interested in solving this
problem and in making sure that it does not continue. This is a critical point
in the process, as this is an easy reason to deny your OIC.
Process Your
Information
Once I determine
that an OIC is worth the effort, I will begin to craft your financial story. I
will tell the story in numbers, supported by the information you provide. I'll
be looking at those numbers to determine if you may have special circumstances
that are worth noting in your story (more on special circumstances later). I
will consider using methods for each item that support your need for an OIC and
why it is in the Government’s best interest to settle your debt at less than
face value.
It is worth
noting here that while this process is called an offer, and it does have
elements of a contract between the Government and you, the taxpayer, it is not
a process whereby you can make an offer to settle on a basis similar to a real
estate deal or a car purchase. Lowball offers are seldom accepted and do not
generate the kind of support needed from the IRS in this process ( See the
section above). Any offer you make has to be well reasoned and supported by the
data you, the taxpayer, provided. I will consider more factors in my
decision-making process, such as the Collection Statute of Limitations, future
earnings prospects, etc. The point I’m trying to drive home here is this – don’t
expect to have success by spitballing a low number to the Settlement Offer. This
doesn’t work and you are wasting a valuable opportunity to get your IRS
troubles settled.
Submit the
OIC
Very
straightforward process. Due to several fraud and computer hacking issues, your
OIC is best delivered via Certified Mail, with all the supporting documentation
attached. Settlement Officers will not communicate via email and they will not
accept thumb drives or something similar. Most offers are too cumbersome for
fax transmission. I want the Settlement Officer to have clean copies of all the
information I submit on your behalf.
The actual
location depends on your home address. The takeaway here is that we want to
make sure that the Settlement Officer receives your OIC. We will take our cues
from the Settlement Officer. We want verification of the receipt of your OIC in
case the processing center misplaces your application, which has happened
before.
Review by the
IRS and Verification of Assets and Income
Once received,
the IRS will review your OIC for technical compliance – did you sign where
needed? Did you send your processing payment and initial payment? Did you
include all required schedules? Your OIC will be assigned to a Settlement
Officer who will review and work your OIC. Settlement Officers specialize in
reviewing OIC and, for those offers that are not accepted, trying to resolve
your situation in another way. My experience with Settlement Officers is positive.
I find that they do not have the hard edge that you may find in a collection
officer, which makes it easier to resolve your particular situation.
Once the
technical compliance is completed, the Settlement Officer your Reasonable Collection
Potential (RCP). This is exactly what it sounds like – at the moment in time of
your OIC, how much can the IRS expect to collect from you in the next 24
months, or the amount of time left to run on your collection statute of
limitations, whichever is shorter.
We will go into
RCP in much greater detail in the next chapter. This is a key concept to understand.
Having an Enrolled Agent explain this principle to you will save you headaches
(and maybe some heartache) in the future.
Counteroffer
or Acceptance
Once the
Settlement Officer has completed their review, they will provide you with a yes
or no answer, supported by a spreadsheet with the figures they used to analyze
your offer. This is your opportunity to accept the offer, or to formulate a
counteroffer, based on the numbers (emphasis added). This is not a give-and-take situation, or a
"why don't we split down the middle". This is your opportunity to
review those numbers and formulate a counter-offer based on the differences you
find in the offer or other matters that the Settlement Officer did either not
consider or did not give enough weight to. Do not be tone deaf – listen to
feedback provided by the Settlement Offer and the spreadsheet and re-formulate
your counter.
You’ll recall in
Chapter One that I made the analogy to this having elements of contract law. Well,
not that your OIC was accepted comes the time to read the fine print and
realize that “terms and conditions apply”. Part of those terms is that you
agree to stay in compliance for five years. That is, you agree not only to file
but make sure you have no tax unpaid tax due when all is said and done at the
end of the year. Your failure to heed this condition will lead to disastrous
consequences. Failure to say compliant
can lead to voiding your entire OIC up until the last payment is due. Read all
the terms and conditions and be cognizant of the penalties associated with
breaching them.
We will dive
deeper into this area in Chapter 3.
Key Takeaways
1. Documentation. Documentation. Documentation. You can not tell your financial story successfully with out all of the documents.
2. Compliance with the terms and conditions of your offer once its filed. Stay current in your filings and pay what you owe as you go!