An Offer in Compromise is an attractive option to many taxpayers as it provides a way for taxpayers to settle their tax for less than what’s owed. However, according to the Internal Revenue Service, only about 30% of offers are accepted on an annual basis. Therefore, when thinking about whether to submit an offer, you should carefully assess whether you are a good candidate. The downsides to a failed Offer in Compromise may include 1) non-refundable deposit 2) extension of the IRS’s time to collect the tax, 3) the accrual of interest and penalties and 4) possibly delaying your eligibility to discharge tax debt in bankruptcy.
When considering whether you are a good candidate for an offer, you should consider the following:
1) AGE – as you become older, your future earning potential decreases. Consequently, when considering whether to accept an offer from a 75 year old, the IRS is going to consider the fact that they may not collect much more from this taxpayer over the remainder of the collection statute. However, if the taxpayer is in their prime, it is very possible that the taxpayer may earn more in the future, and therefore, the IRS is less likely to commit to a very low offer if the taxpayer’s future earning potential is high. (The IRS will take into account the taxpayer’s education, past job experience, etc.)
2) ASSETS – the saying in the tax business is: “If you have no assets, you have no tax problems.” This is very true when it comes to an Offer in Compromise. The more equity you have from assets, such as a home, 401K, boat, jewelry, etc., the higher your offer is going to have to be. (These assets will have to be included in the offer.) Please note that some restricted assets such as retirement funds can become fair game in an Offer in Compromise.
3) INCOME – disposable income is another significant factor in the Offer in Compromise process. First, when calculating your disposable income, be mindful of the IRS standards for expenses. If you have expenses that will not be allowed, then your disposable income will actually be higher according to the IRS. Second, the IRS is most likely not going to accept any offer which is lower than what they can collect from your disposable income over the remainder of the collection statute…which leads us to the next factor…
4) COLLECTION STATUTE – the IRS legally has ten years to collect on your tax debt. This may be extended for various reasons; however, it is important to know how much longer than can legally collect on older debt. If you are very close to the end of the collection statute, it may not be worth submitting an Offer in Compromise. Likewise, if you only have a couple of years left, you may also be in a better position to submit a lower offer.
5) BANKRUPTCY ELIGIBILITY – depending on the age of your tax debt and if you filed an actual return (before the IRS prepared one for you), you may be eligible to discharge these taxes in bankruptcy. Taxes eligible for discharge may enhance your likelihood of the IRS accepting the offer. If the IRS is aware that you may file bankruptcy (and it looks like you may file a Chapter 7 no asset bankruptcy), then they will not be able to get anything for this tax if succesfully discharged in bankruptcy.
6) COMPLIANCE – There is a five-year probationary period associated with the acceptance of an Offer in Compromise. What does this mean? This means that if your offer is accepted then it is very important that you don’t accrue any tax debt (which you cannot pay off) by the due date of the return for at least the next five years. If you do have a tax debt that you cannot pay, then the total tax debt associated with the Offer in Compromise is reinstated and you are back to square one with owing the same amount of taxes pre-Offer in Compromise. Therefore, if you are not good with sending in estimated tax payments or think you will not be current by the end of the year when submitting your present Offer in Compromise, then you should examine other options, such as bankruptcy, or at least hold off on submitting an Offer in Compromise until you think you can become compliant.