You have read the Form 656, Offer in Compromise booklet, the rules under the Fresh Start Initiative, and perhaps even hired an attorney or other representative to help you submit your Offer in Compromise to the IRS. You feel you have sent in a complete Offer, with all documentation attached. You feel the IRS should accept it. You are excited to put your IRS tax issue behind you forever. Perhaps you’re considering the freedom you’ll experience by ridding yourself of that IRS tax lien, or the sleep you’ll get now that you no longer owe the IRS tens or hundreds of thousands of dollars. But you never truly know what the IRS will say in their reply. This article should give you some insight into the common responses you will get from the IRS in the context of an Offer in Compromise, some common challenges you will face, and some of the more creative methods you may want to employ (or hope your representative will employ for you) to combat them.
Before you file your Offer in Compromise, there are decisions you can make that could increase your chances for success. If you have made the decision to file an Offer in Compromise, and your case is assigned to a Revenue Officer, you may want to decide if filing the Offer through that person’s office (and thereby having he or she review it prior to submission to the Offer in Compromise Unit) is a good idea. Sometimes, if you have an excellent relationship with this person, or if they recommended you file an Offer in the first place, this is a good idea. It may even be a mandatory requirement from the Revenue Officer’s viewpoint. The Revenue Officer has a lot of power and can notify the Offer unit if a particular Offer is worth accepting or not. If the relationship is not good, you may want to simply file your Offer directly with the Offer unit (the address is on the Form 656) and merely provide your Revenue Officer with a copy. Occasionally, a Revenue Officer’s bias toward an Offer’s viability can prevent the Offer unit from giving you a fair shake.
The first thing you should know about the challenges you will face with an Offer in Compromise, is that, unlike Installment Agreement discussions, the Offer negotiation process can seem to drag on forever. From the date the IRS receives your Offer in Compromise, to the date you receive an official acceptance letter, the wait could be anywhere from a few months to more than a year. If you are filing an Offer in Compromise for an individual, the wait tends to be shorter. If you are filing on behalf of a business, perhaps including multiple business officers who are also trying to settle Trust Fund Recovery liabilities, the wait will likely be much longer. You should not expect to be able to refinance your house, engage a factoring or funding company to help your business, or in any way rid yourself of an IRS tax lien within a few months after filing the Offer in Compromise. The reason for this is because even if your Offer in Compromise is accepted within a short period of time, your tax lien will not be removed from your home, and the debt considered settled, until after you fund your Offer. And if you are paying your Offer amount by way of “periodic payment,” that means your tax lien will remain for perhaps a little over 2 years after acceptance.
The best way to speed up this process is to ensure that your Offer is complete to begin with, and then be prompt in providing additional financial documentation when the IRS asks for it. Taxpayers frequently waste valuable time in the Offer process by sending in incomplete Offers, or by sending in documentation that is too old. Generally, if the documentation is more than a year old at the time they review it, the IRS will ask for new documentation to support your financial hardship. If you have unusual or extraordinarily high living expenses for one reason or another, you need to be prepared to submit the right kind of supporting documentation to get these expenses allowed. Your failure to do so can slow the Offer process down considerably. If an Offer Specialist receives your Offer and can’t support your expenses with the information in the file, or if the information is too old, they will ask for more documentation.
If you fail to comply, the IRS may do one of 2 things: (1) The IRS may “reject” your Offer in Compromise, and offer you the right to appeal this rejection. If you exercise your right to appeal within 30 days, the IRS will send your case to a Settlement Officer in Appeals, where they will conduct a review of the file, and perhaps ask you for more information. (2) The IRS may “return” your Offer in Compromise. If the IRS returns your Offer in compromise, you are afforded no appeal rights, and your case is sent back to IRS Collections. A return is common if you fail to provide documentation when asked, or if you are no longer in compliance with the tax laws, e.g. you have missing tax returns, or accrued additional tax liabilities during the wait for your Offer to be reviewed.
It is vital that you verify whether or not your Offer in Compromise is being returned or rejected. The difference is crucial. A returned Offer means you may be exposed to imminent bank levies, wage levies, or seizure of assets. If, prior to the Offer, you had been suffering from enforcement measures by the IRS, such as bank levies, wage levies, or the threat of seizure, the long wait you experience as the IRS reviews your Offer in Compromise may be welcome. As such, having your Offer immediately returned, and your case sent back to Collections, could be disastrous. A rejected Offer, on the other hand, means you have the right to fight another day, without being subject to enforced collection action first.
Often, rather than rejecting or returning the Offer, an Offer Specialist at the IRS may respond with a request that you increase the amount of your Offer. Keep in mind that the IRS uses a mathematical formula to determine an acceptable settlement amount. Your income, your allowable expenses, and the equity in your assets make up a long list of factors that go into this mathematical formula. It is very common for an Offer Specialist to disagree with your calculations about your income, your expenses, or your net equity in non-exempt assets. In order to maximize the amount you will settle for, the Offer Specialist may try to overstate your income, disallow certain expenses, and/or overvalue your assets. If they do so and ask you to increase the amount of your offer, it’s important to read the Offer Specialist’s counter-offer carefully. The Offer Specialist may be using select information from a select time period in order to inflate your Offer amount. Alternatively, the Offer Specialist may have disallowed certain expenses which, in fact, should have been allowed.
For example, a good attorney or tax negotiator can counter with substantive information or other circumstances that would increase your “allowable” expenses, or lower your income, or both. The IRS is required to allow you to meet any expense that is necessary for your own production of income, and for the health and welfare of your family. This can be as broad and as narrow a definition as the particular Offer Specialist wishes it to be. Within these confines, a good negotiator – preferably an attorney – can make detailed arguments that support why your denied expense is necessary for you to live, or is necessary for you to earn money. As the saying goes, you have to spend money to make money. This is often as true in a household as it is in a business. For instance, an Offer Specialist may insist that your home’s rent or mortgage is outside the monthly guidelines of what you should be allowed in your county. But you may argue that your use of your home enables a certain percentage of your income to be larger than it otherwise would be. And this doesn’t necessarily need to result from using a home office for work. Your home location could be uniquely located to a bus line, or your work location, thus enabling you to save money in other areas, and “increase income” by those means. The different arguments to be made are as various as the circumstances of life.
Similarly, despite the new “Fresh Start” rules that allow businesses to omit “income producing assets” from the Offer calculation for the first time ever, the IRS may insist on including equity in certain “income-producing” assets within your Offer amount, because the Offer Specialist disagrees with your belief that they are “income producing.” For example, the IRS may insist that, because your hauling business has two dump trucks, one of those dump trucks is unnecessary for the production of income. It will be incumbent upon you or your representative to explain why the second dump truck is necessary, and perhaps even go as far as calculating how much income a given dump truck produces. Often, citing the work of local competitors, and the fact that they have multiple dump trucks, is one method for explaining your need for two. Alternatively, if you have multiple employees who are qualified to operate commercial vehicles, you can argue that you need both drivers working simultaneously, and therefore multiple trucks. Perhaps you can argue that the trucks have brought in business by way of marketing your company name, which is inscribed on the side.
A good representative can ask you the right questions to elicit the information he or she needs to make a creative, and ultimately successful, argument. As such, the right or wrong representative could be the difference between paying thousands less – or more – to the IRS in a settlement.