Promises of Tax Settlements for “Pennies on the Dollar” are Often Too Good to be True

At R&A CPAs, we often find ourselves counselling individuals or businesses that are overwhelmed by large tax liabilities or mired in IRS bureaucracy. Like you, we see ads promising amazing “pennies on the dollar” settlement deals with the IRS touted by “professionals,” backed up by dramatic testimonials of success. These settlements refer to the IRS’s Offer in Compromise (OIC) program (sometimes referred to as the Fresh Start program) and the ads often misrepresent how the IRS actually handles these agreements. In fact, in the IRS Dirty Dozen list, the IRS warns taxpayers about businesses that charge high fees to apply for an OIC without determining eligibility or delivering results. Of this scam, the IRS says, “The Offer in Compromise program can help certain eligible taxpayers resolve tax debt when they are unable to pay in full, but “OIC mills” often overpromise results and charge high fees to taxpayers who don’t qualify. Taxpayers can check eligibility using free IRS tools to avoid high-pressure sales tactics.”

What is an Offer in Compromise?

An Offer in Compromise is an agreement between a taxpayer and the IRS that settles a tax liability for less than the full amount owed. If the value of a taxpayer’s assets and income are less than the tax liability, the IRS will consider settling the debt for less than the amount due since there is doubt about the collectability of the tax. The IRS is willing to compromise with taxpayers to get something rather than nothing.

In general, the IRS won’t accept an Offer in Compromise unless the amount offered by the taxpayer is greater than or equal to  the “reasonable collection potential” (RCP). The IRS calculates RCP by adding the value of the taxpayer’s assets to anticipated future income and subtracting certain amounts allowed for basic living expenses. In other words, if your assets are larger than the amount of tax you owe, OIC probably won’t work for you.

Taxpayer assets include bank accounts, investments, retirement accounts, real property (including homes), automobiles, trusts, and other property like jewelry or collectibles. Taxpayer expenses are limited to basic costs of living like rent, healthcare costs, and childcare payments. Most expense items are restricted in amount to an allowable  standard determined by your household size and region of the country you reside in. Some expenses can’t be counted at all such as private school tuition, charitable contributions, and payments on unsecured debt (like credit cards). Expenses the IRS deems extravagant or non-essential for the production of income or the health and welfare of your family are not allowed.

The Offer in Compromise application is a very formula driven process that uses expansive asset calculation and restrictive expense deduction.  The IRS only accepts 30 to 40 percent of the OIC applications they receive because of this.

Taxpayers who qualify for Offer in Compromise use the IRS Form 656 Booklet to make application. The forms in the booklet are very time intensive to complete; the core form is eight pages of densely packed questions. In addition, taxpayers are required to collect and submit many documents including most recent pay stubs, three months of investment account statements, and statements on loans. Once all the income and expense information is entered on Form 433-A, Collection Information Statement, the minimum offer amount is calculated using a formula provided by the IRS.

To qualify for an OIC, you must prove that paying your full tax liability would create severe financial hardship. You must be up to date on filing all tax returns and be current on estimated tax payments. You cannot be in an open or active bankruptcy proceeding. The IRS has an Offer in Compromise Pre-Qualifier tool at Offer in Compromise Pre-Qualifier to help you determine if OIC would work for you.

If you think you qualify for an Offer in Compromise, you can start the filing process directly through your IRS individual online account, or you can do everything on paper using the 656 Booklet. We think it’s a good idea to consult with a tax professional in the process, but you can keep professional fees down by filling out the forms and collecting substantiating documentation yourself. It’s more cost effective to have the tax professional review your application instead of having them complete it for you.

If you don’t qualify for offer in compromise, the IRS has other avenues for payment, including installment agreements, and in some cases, penalty relief. The important thing is to work with the IRS. Ignoring a tax debt (or any IRS issue) only makes everything worse in the long run.

Do you have questions about Offer in Compromise or other IRS settlement options? Give us a call. We are happy to assist you in resolving your IRS worries.