Tax Solution: Offer in Compromise
Used When: You are able to pay off some of what you owe, but not all of it.
Ever seen a TV commercial with some guy screaming about how he can get you “PENNIES on the DOLLAR!!!” for your tax debt? It sounds great, right?
Who wouldn’t want to pay pennies on the dollar for taxes?
But an offer in compromise only works for certain people, in the right circumstances, after being put through a rigorous qualitative and quantitiative analysis. And even if it’s a good fit, there is certainly no guarantee of only paying “pennies on the dollar”!
Let me explain:
An offer in compromise is an offer to the IRS to “settle” your tax debt for less than what you owe. It is a contract between you and the IRS saying that you will pay a specified amount–either as a lump sum, or in installments over 24 months–and that will substitute for the entirety of your unpaid tax debt (included in the offer), penalties and interest included.
The great thing about the offer in compromise that you do not see with other tax debt solutions is its permanency. Pay the amount you owe, pay it on time, and you are done! You’ll never have to worry about paying the debt from that tax period again…even if the amount you ultimately had to pay was just a small fraction of what you originally owed!
What’s the catch?
The problem is that, statistically speaking, only 25% of people who apply for an offer in compromise actually get it! The reason is simple: many who apply don’t even actually qualify for an offer in compromise in the first place!
So how do you know if the offer in compromise is the best, most likely tax resolution for you?
How does an offer in compromise work?
The IRS wants to know 2 things about you before it determines whether or not to grant you an offer in compromise: 1.) what is your cash flow after reasonable expenses, and 2.) what are your assets? The IRS wants to know these things because the amount the IRS will be willing to settle with you for an offer in compromise is based on a combination of how much money you have flowing in over the course of 12 – 24 months, plus how much you could sell certain assets for.
There is a huge catch, though:
The part about your expenses could easily be abused, of course, if there was no limit on it. Suppose you were making hundreds of thousands of dollars a year, spending all of your money on private schools, luxury cars…your expenses would be high! So if you were this person and trying to apply for an offer in compromise, and just plugged in your expenses as they are, it would be rejected!
The IRS actually has extremely strict limits on the expenses you can consider for your offer in compromise. And lowering your expenses increases your take home cash flow, which in turn increases the expected amount of the amount the IRS would be willing to settle with you for.
These limits can be overcome in certain specific, individualized situations–where it can be shown that you need those extra expenses out of necessity, or that forcing you to lower them would overall cause you hardship or lower your ability to meet your tax obligations. However, in general, your ability to qualify for an offer in compromise is closely related to your nearness to the IRS allowable expenses.
How can I tell if an offer in compromise is the right resolution for me?
Call to action: download our ebook on choosing the type of tax resolution that is good for you.