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Misperceptions & Mistakes About IRS Offer in Compromise

  • December 18, 2019

The IRS Offer in Compromise program is a terrific opportunity for taxpayers to get a fresh start by wiping away their tax debt.  However, it is not without its drawbacks. There is a lot of misinformation and misperceptions out there about this program. I'm going to review some common myths and mistakes people make when attempting an Offer in Compromise, which can cost them their opportunity for a clean slate. After reading these, if you would like help with an offer for yourself, contact us so that one of our Tax Problem Solver Team can help you get a Game Plan together.

When people hear about the IRS option to “settle” tax debt, called the Offer in Compromise, they typically have one of two reactions: Either it’s too good to be true and isn’t a legitimate option, or they think that if they can find a good negotiator, they can get the best deal from the IRS.

Here's why both of those perceptions are wrong:

1st Misperception: A settlement like that is just too good to be true

This program does is real, and it really can work out great for some people. The IRS doesn’t want to spend 10 years (the allowable length of time allowed for that kind of tax debt) trying to collect it from someone who simply can’t pay.

The IRS Offer in Compromise program exists to provide a fresh start to qualified taxpayers in hardship circumstances. The IRS is willing to accept a settlement amount and write off the remaining debt. People who get an Offer in Compromise also have to stick to some agreed-to conditions in order to keep the agreement active, like letting the IRS keep their refund the following year and committing to filing and paying all their taxes for the next five years.

2nd Misperception: The key to settling tax debt is negotiating with the IRS

The Offer in Compromise program is not a test of negotiating skills. People who hold this assumption mistakenly think that they can just lowball the government, stick to their position, perhaps walk away from the table once or twice, and come out with a great offer amount.

In truth, getting an Offer in Compromise is a matter of simple math, to the IRS. They will run a formula based on your income, assets, and allowable expenses (based on extensive documentation and financial statements you will have to submit). The result is the amount the IRS feels is reasonable to collect from you – and they won’t take less than that.

My Team and I can help you determine the correct offer amount since we know the standards the IRS uses and which expenses you can and can’t include. There are a few gray areas, but even those are based on which expenses should be allowed (back to the formula).

Common Offer In Compromise mistakes

Offer In Compromise Mistake #1: Hiding your assets or money

The IRS uses your financial information to decide whether or not to accept your Offer in Compromise. This includes looking at all of your assets and income to decide if you can afford to pay more than the amount being offered. This tends to create a temptation to hide money and income from the IRS in order to make your offer look more attractive.

Avoid this temptation. Don't even go there.

The IRS has a variety of tools to verify the financial information you submit on Form 433-A, including checking DMV records and reviewing financial statements. If they discover assets or money that you did not disclose, your offer will be immediately rejected.

But that’s not all – and this is very important: Form 433-A is signed under penalty of perjury, which means you could be criminally prosecuted for perjury, which is a felony. If convicted, you would lose your right to vote, own a firearm, and you would have a criminal record forever.

Mistake #2: Engaging in frivolous spending

As part of the offer in compromise process, the IRS will review your bank statements to verify your income and personal living expenditures. If they see what they consider frivolous spending, they will assume that you have untapped disposable income that can be used for paying your taxes, which most often leads to a rejection of your offer. So, don’t make this common Offer in Compromise mistake.

“Frivolous spending” can include eating out too often, shopping for unnecessary items like consumer electronics, and going on vacation. So, it’s vital that you closely monitor your spending and avoid any purchases that can be construed as unnecessary for at least three months prior to your Offer in Compromise submission, as well as throughout the entire time it is under consideration. They do not cut you a lot of slack in arriving at this determination.

Mistake #3: Not paying the compromise offer amount

The IRS does not require payment of the offer amount until after it is accepted. Depending on the conditions of your offer in compromise, you might be required to pay the offer in full or in payments. Either way, do not fail to pay the offer amount. This will cause the IRS to revoke acceptance of your Offer in Compromise, meaning that you will have to re-submit it and go through the entire process all over again.

Mistake #4: Not filing your tax returns afterward

As a condition of acceptance, the IRS requires that you remain in compliance with your tax filing obligations for the next five years. If you fail to file a tax return during this period, your offer’s acceptance will be revoked and the tax debt you once owed will be reinstated. So, it is crucial that you file all of your tax returns, even if you cannot afford to pay the tax at that time.

Mistake #5: Falling behind again on your taxes

Similar to the requirement that you file all of your tax returns, the IRS also requires that you not fall behind again on paying your taxes for the next five years. So, make sure that the correct amount of taxes are withheld from your paycheck or that you make the necessary quarterly estimated tax deposits on your self-employment income. If you end up with a balance due at the end of the year that you cannot afford to pay, be sure to contact the IRS and establish a formal repayment plan. Do not let the balance linger or you might find yourself back to square one when your Offer in Compromise is reversed for failure to remain in compliance.

Mistake #6: Applying when you are not eligible

Eligibility requirements for the IRS Offer in Compromise program are strictly enforced. It is a waste of your time, money, and efforts to submit an offer if you do not meet these requirements. Of all the offer in compromise mistakes, this is the easiest to avoid. You need to determine your eligibility upfront – do your homework!

Mistake #7: Providing inaccurate information in the application

The application process for the Offer in Compromise program is long and tedious. When filling out Form 656 and Form 433-A, you must be very careful to make sure all of your information is correct. Incorrect information can lead to processing delays and possible rejection of your offer.

One of the most common mistakes people make is misstating the amount of their tax debt or the year of their tax debt. Do not simply guess or go off of memory. You can call the IRS and verify this information by calling the taxpayer hotline. You must be buttoned-up throughout this entire process. Failing to do so will most likely be caught and lead to rejection.

Get all the facts before pursuing Offer in Compromise

Avoid any tax professional who promises you an Offer in Compromise without knowing anything about your financial situation.

However, if you owe tax debt that you don’t think you can pay, it’s worth evaluating whether an Offer in Compromise is a good solution for you, especially if you don’t have any assets, you’re living modestly, and you’re struggling to get by each month.

Get a free consultation from Larry Heinkel and his team at Tax Problem Solver to see if an Offer in Compromise is your ticket to freedom from the IRS! You can click here to read more about Offer in Compromise on our website. Then be sure to fill out the form at the top or bottom of the page, for that free consultation.

Even if you don’t qualify for an Offer in Compromise, there are other options you may qualify for, like deferred payment or a monthly payment plan. Contact me and my Tax Problem Solver Team if you have unpaid tax debt, to find out what your options are – you need a Game Plan. You can reach me by email at Larry@TaxProblemSolver.com or phone my office at 855-BEAT-IRS (855) 232-5752).

About the Author Larry Heinkel J.D. LL.M

Larry Heinkel is a tax and bankruptcy attorney with more than 37 years experience helping businesses and individuals, solve their state and federal tax problems. Mr. Heinkel has been extremely successful in representing his clients before IRS and DOR, and is known throughout Florida as an expert in tax problem resolution.

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