Can my business settle its IRS tax liability with an in-business Offer in Compromise?

When the Internal Revenue Service created the Offer in Compromise program, the candidates they probably had in mind were those people who were struggling to keep the lights on, feed and clothe themselves and their children, and keep a roof over their heads.  The ideal candidate, they most likely surmised, is not a for-profit business.  Giving a break to one business that neglected tax liabilities is essentially giving that business a government-sponsored competitive advantage over other businesses.  This is not something the IRS is wild about doing.

But that does not mean a business cannot benefit from the Offer in Compromise (aka “OIC”) program, and continue to operate.  They just face tougher qualifications to get in the door, and more scrutiny once their Offer is being reviewed by an Offer Specialist. But your business may well be able to score that competitive advantage, regardless of the reluctance of the government.

Like with any OIC, the threshold issue is whether or not a business is current with tax returns, and tax deposits.  The most common form of delinquency for businesses is 941 employment taxes, which accrue when a business owner fails to make timely payroll tax deposits while disbursing paychecks.  If a company has not filed all returns, and is actively “pyramiding” (accruing new balances in the current quarter), it won’t even get the Offer in the door.   If you have delinquent outstanding returns, get them filed.  If you’re not current, make every effort to get current.  And avoid playing catch-up; after all, you’re going to compromise on all the past liabilities, so it’s counter-productive to pay those old liabilities up when you’re continuing to disqualify yourself from Offer candidacy by accruing new liabilities.

Another rule that can delay submission of the Offer is that a Revenue Officer must have made a determination regarding the Trust Fund Recovery Penalty for all officers.  In other words, the IRS needs to have issued the Letter 1153 (a proposed assessment of the Trust Fund Recovery Penalty) against all responsible officers.  Alternatively, the company needs to pay off the Trust Fund Recovery Penalty (TFRP) before filing the Offer.  (See my January 2013 article for more on this).

Once a business is current with returns and deposits, and a TFRP determination has been made, you can take a look at the company’s financial profile to determine if it’s a good fit for the Offer program.  Just as with the individual Offer, the IRS looks at equity in assets and the company’s net monthly income.  However, with the onset of the “Fresh Start Initiative” in May of 2012, the IRS allowed businesses to deem any assets “necessary for the production of income” as exempt from the Offer calculation.

This means that the $40,000 cement mixer your company owns free and clear could be totally exempt from the asset side of the Offer calculation provided it’s necessary for income production.  This means that the in-business Offer in Compromise isn’t an option that’s confined only to small offices or restaurants with low-dollar assets.  Even a construction company with a fleet of semi-trucks could theoretically qualify if the assets are being used to make revenue.  That being said, the IRS may quiz you pretty heavily with respect to these assets to determine if they’re truly necessary.

The other area where you may have to fight the IRS is accounts receivable.  Any businessperson knows that “accounts receivable” is just another name for future income that you’ve already earned, but have not yet received.  It’s not a boon to your business to have A/R necessarily, but the IRS will still refer to that as an asset, separate and apart from the income you earn month to month as reflected on your profit-and-loss statement.  This is because, from a collections standpoint, the IRS could levy your receivables, and therefore recoup what’s owed to you in one fell swoop, potentially paying off the tax liability.

That said, provided the business is “otherwise profitable” – that is, it has leftover income after meeting all business expenses, including taxes – then the A/R may be deemed exempt as necessary for the production of income.  Paradoxically, if your business is running in the red, the IRS will not allow you to exempt your A/R – or even that cement truck! – because the business is not “otherwise viable.”  In this rather odd scenario, two identical companies whose sole distinction is that one is viable, and the other one is losing money, would have very different Offers.  And it’s the company that’s bleeding cash that could be told they have to come up with MORE money for their Offer than the profitable company.

As you can see, the process for settling your business debt by way of an Offer in Compromise is complicated, and full of unsuspected pitfalls.  You may want your accounting to be in good shape, and you will definitely want a qualified expert preparing the Offer for you so that you don’t waste a whole bunch of time and money submitting an Offer that has zero chance of being accepted.  Another reason I recommend having a qualified expert assist you is that it will maximize your chances not only of getting the Offer accepted, but also of getting the lowest possible settlement amount.

If that’s not enough to convince you to seek professional assistance, consider the fact that oftentimes the fee that you pay to a professional negotiating an Offer in Compromise on your behalf is money that would otherwise go to the IRS.  If that is the case, then your professional services for negotiating an Offer are effectively free.  To learn more about this concept, click here.

About Jeremy R. Dickman, Esq.