IRS Offer in Compromise

Many lawyers specialize in IRS negotiation strategies. A competent lawyer (sometimes a former IRS agent him- or herself) can turn a $50,000 debt into $8840, $105,000 debt into $5148, and so on. The IRS has a system of considering a taxpayer’s offer to completely settle tax debt for less than what is owed. These well-named offers are called “compromises” of the debt.

Such compromise settlements of tax debts are encouraging, but they do not come easy. The IRS will not consider agreeing with an offer in compromise unless the taxpayer has exhausted every other means of payment, including the possibility of a payment plan.

You should be very wary of people who “guarantee” to get the IRS to accept a compromise, because they cannot do so. Even the IRS itself now is warning taxpayers about unscrupulous companies who make false promises at your expense.

There are three reasons for which the IRS might consider a compromise settlement.

• First, there is doubt about whether or not the taxpayer really owes the proposed taxes. It does happen on occasion that the IRS is wrong!
  
• Second, there is real doubt about whether or not the taxes ever can be collected.
• Third, “exceptional circumstances” may apply to a taxpayer’s case, such as poverty. The IRS will not turn a blind eye on a taxpayer who innocently falls into serious tax troubles and has, for example, severe health issues or young children. In instances of personal poverty, the IRS even may waive the normal $150 fee for filing a compromise offer (the poverty guideline exception, via Form 656-A).
  

Unfortunately, many commentators assert that OICs can be unpredictable from district to district. One expert even claims that it is impossible to achieve compromises in certain IRS districts, based solely on the policies and beliefs of each regional IRS administrator. If this is the unfavorable situation in your district, consider getting your congressional delegation involved in your case.

If you already have an IRS payment plan in place, this does not mean you cannot try to make an offer in compromise. If your circumstances radically change, like if you become impoverished, you can attempt to make a final settlement rather than struggling to keep up with onerous monthly payments. Employers who owe IRS taxes, in particular, need to have been current with payments for at least two tax periods before making a formal OIC.

When settling a business tax debt, it could be much like the situation of an operation with “mixed results”… i.e. the doctor got the nail out, but the patient died. Many businesses with an OIC actually are closing, and the IRS simply is trying to get the most it can from vanishing sums.

If you enter into a compromise agreement, you most likely will be giving up some important legal rights. The statute of limitations, which limits the time during which the IRS is entitled to begin to collect past taxes from you, almost certainly will not be allowed to run out while you are negotiating. For this reason, you need to be extremely careful about comparing your liabilities with more than just the likelihood that the IRS will collect – you need also to consider fairness. It is important to speak with an attorney who specializes in taxation before entering into an offer in compromise.