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.
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.
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!