What You Should Know About the Downsides of an IRS Offer in Compromise

Summary

An Offer in Compromise is a tax resolution option that allows individuals to pay off their tax debt for less than they owe. While it offers benefits, there are also downsides to consider. Filing an Offer in Compromise requires a $205 application fee and an initial payment of 20% of the proposed lump sum amount or the first month’s payment for periodic payments.

The IRS will scrutinize financial records, and accepted offers become public records. The process can be lengthy, taking up to a year or more, and may result in rejection. In case of rejection, the application fee and any payments made are not refundable, and an appeal process can be long and complex. Alternative solutions such as installment agreements or currently not collectible status may be more suitable for those with equity or assets they want to retain.

What Are the Downsides of an IRS Offer in Compromise?

If you’re behind on your taxes and you have started looking into your payment options, you’ve likely considered an Offer in Compromise. An Offer in Compromise essentially lets you pay off your tax debt for less than you owe. While there are lots of benefits that come with an accepted Offer in Compromise, there are also downsides you must consider before you take the plunge.

When you fully weigh the advantages and disadvantages, you can make the best choice for your financial situation and tax needs.

Overview of an Offer in Compromise

An Offer in Compromise is a tax resolution option intended for those who cannot afford to pay their tax debt off in full. The IRS always prefers to collect payment in full when possible—but when someone truly cannot pay their taxes in full, they would rather be guaranteed partial payment than nothing at all.

When you send in the paperwork for an Offer in Compromise, you make an offer based on what you can afford. You can choose to either pay the amount owed in one lump payment or spread it out over up to 24 months.

You have to meet certain criteria to apply for an Offer in Compromise. First you must have filed all of your required tax returns and—if applicable—made all of your required estimated tax payments. You must also not be in an open bankruptcy proceeding. If you’re an employer, you must have made tax deposits for the current year and the past two quarters prior to application.

Situations Where an Offer in Compromise May Make Sense

If you cannot make the minimum monthly payment for an installment agreement, you may want to consider an Offer in Compromise. The minimum payment for an installment agreement is generally your total due divided by 72. If that monthly payment would create a financial hardship and you don’t have enough assets or equity to pay off your tax debt, an Offer in Compromise may be a viable option.

Financial Implications of an Offer in Compromise

While an Offer in Compromise is well-suited to those with limited financial means, it does require some upfront money. It’s important to consider these expenses and how they may affect your budget moving forward.

Upfront Costs

With your offer in compromise forms, found in Form 656-B Offer in Compromise Booklet, you must also submit a $205 application fee. This is non-refundable.

With each Form 656 you submit, you also have to make an initial payment. If you propose a lump sum payment, the initial payment is 20% of your offer amount. If you propose a periodic payment schedule, you must send in the first month’s payment. For as long as the offer is being considered, you must continue making monthly payments.

If you meet low-income certification guidelines, you do not have to send the application fee or the initial payment. You are also free from making monthly payments while your offer is reviewed.

Payment Options

There are two primary payment options available to you when you suggest an Offer in Compromise. The first is a lump sum payment. You pay the first 20% when you submit your application. The remaining balance must be paid off in five or fewer payments, and you have up to five months to make those payments.

If you suggest a periodic payment schedule, you must make the first payment with your application packet. Depending on your proposed offer terms, you must make monthly payments for six to 24 months until the proposed amount is paid off.

Increased Financial Scrutiny

One thing you have to accept when you apply for an Offer in Compromise is an intense level of financial scrutiny from the IRS. This becomes clear very quickly when you begin working on the Form 656 Booklet. The IRS requests information on:

• Every checking, savings, and retirement account you have
• All cash you have on hand
• Cash value of life insurance policies
• Value, equity, and monthly payments for every personal asset you own
• Information on your business’s income and expenses, if applicable
• Your monthly household expenses
• Your monthly household income

The IRS genuinely requires a complete 360-degree view of your finances before they will consider an Offer in Compromise.

Impact on Tax Refunds

Per the IRS, once you have an accepted offer agreement, the IRS keeps any refund for taxes due through the date on which the offer is accepted. This applies only to the refund for the taxes due prior to the Offer in Compromise acceptance date, not refunds moving forward.

Legal and Public Records

Few people realize that an accepted Offer in Compromise is public record. This information is available on Form 7249, an Offer Acceptance Report which anyone can request from the IRS. This form includes the taxpayer’s name and location, acceptance date, liability description, and the reason for the acceptance of the offer.

How Your Reputation May Be Affected

While this information is public record, people do still have to officially request it from the IRS. Most people who request an Offer in Compromise won’t have anyone digging into their background to find out if they’ve had tax issues. But if you are a local business owner, have significant standing in your community, or have a reputation built on your financial status, this type of information could have a negative impact on your community standing and reputation. This is something to keep in mind if you personally are a big part of your brand.

Time Commitment and Process Length

Few IRS tax resolution options offer immediate relief, with the exception of an installment agreement application that is immediately approved or declined when you apply online. The same is true for an Offer in Compromise—the IRS needs time to review all of your information in detail, and from there, they still have to decide whether your offer is fair.

Timeline

In general, you can expect the Offer in Compromise process to take at least six months. However, the more complicated your file is, the longer it will take. In some cases, it can take up to a year or longer. This can be financially difficult for taxpayers who opted for periodic payments, as they still have to make those monthly payments without knowing if their offer is going to be accepted.

Commitment Needed to See This Process Through

If your offer is rejected, the IRS may counter with another offer that they consider to be fair. This extends the timeline once again and requires more deliberation on your part. Basically, keep in mind that this is a long and mentally demanding process—there are no fast answers.

Potential for Rejection and Appeal Process

Whenever you apply for payment relief from the IRS, you have to consider the potential for rejection and the emotional fallout that can come with it. Not only should you be prepared for rejection, you may even want to expect it to some degree—if you pin all of your hopes on an accepted offer, it can be devastating to find out that it has been rejected.

In 2019, over 54,000 people applied for an Offer in Compromise. The IRS only accepted 17,890, for an acceptance rate of 33%. The IRS has accepted even fewer Offer in Compromise applications in subsequent years, but usually, the approval rate is just under half of applications.

Impact of a Rejected Claim

Financially, a rejected Offer in Compromise can be painful to accept. You are out your $205 application fee and any payments you have made toward your proposed offer—that’s at least one monthly payment or 20% of the lump sum offer, and quite possibly more. The IRS does not return the money you put toward your offer; they simply apply it to your tax liability. This puts you back at square one but with even less money and a substantial amount of tax debt to tackle.

The Appeal Process

A rejected offer isn’t necessarily the end of the road. Upon being notified of your rejection, you have 30 days to request an appeal. Your appeal forms must be sent back to the office that sent you the rejection letter. You can either send a completed Form 13711, Request for Appeal of Offer in Compromise, or send a letter with this information:

• Your name, address, TIN, and daytime telephone number
• A declaration that you are appealing the IRS’s rejection of your Offer in Compromise to the IRS Independent Office of Appeals
• A copy of the rejection letter
• The tax periods or years involved in your application
• A list of the items you disagree with and why you disagree with each item
• Additional information that may be helpful to the Appeals team
• Facts supporting your stance on any of the items you disagree with
• Laws you are relying on for your disagreement
• Your signature stating that under penalties of perjury, everything you have written is true, correct, and complete

After the IRS receives your appeal request, they will make a final decision and notify you of it. Note that this process is long and complicated, as you have to dispute each and every item you disagree with—and if you don’t provide enough support for your claims, the IRS’s rejection will likely be final.

Alternative Solutions

If you’re starting to think that an Offer in Compromise may not be the best decision for you, it may be time to look into other payment relief options.

Other forms of payment relief that may be a good fit for you include:

• Installment agreement: While no one wants to make payments on their tax debt for six years, the IRS will likely expect you to go this route if you have the financial means to do so. You can make monthly payments for up to 72 months to pay off your tax debt, including penalties and interest, in full.
• Partial payment installment agreement: If you can afford to make some sort of monthly payment but not the minimum required for an installment agreement, the IRS may approve you for a partial payment installment agreement. Like an Offer in Compromise, this option allows you to pay off part of your tax debt and have the rest written off.
• Currently not collectible: Currently not collectible status is not a permanent solution like an Offer in Compromise is, but it may give you some breathing room for a while if you are temporarily unable to make any progress on your tax debt. The IRS keeps you in currently not collectible status until your financial situation changes.

When is Another Option More Suitable?

Another option may be more suitable if you do have equity or assets that you could use to pay off your tax debt, but do not want to sell off. This is a common reason for a rejected Offer in Compromise—the IRS may reject your offer if you have too much equity in your assets. In this situation, a standard installment agreement may allow you to keep the equity you’ve built while still addressing your tax debt.

If your financial situation is precarious enough that the fees and initial payments of an Offer in Compromise would leave you in financial hardship if your offer were to be refused, consider the other two options on this list. Like an Offer in Compromise, they are intended for those with limited income and assets.

Long-Term Considerations

Once your Offer in Compromise is accepted, you may think the deal is done and over with. But the IRS has significant expectations for those with an accepted offer.

Long-Term Compliance

After your offer is accepted, you are required to file all required tax returns, make all estimated tax payments, and make all future tax payments on time for at least five years after your offer is accepted. If you fail to meet all of these terms, the IRS may default your offer. When this happens, you are liable for the original tax debt (minus the payments you have already made) plus interest and penalties.

Planning and Budgeting

This means that for five years, you cannot have any federal taxes go past due, nor can you be late filing your taxes or making estimated payments. This can be a tall order if you struggle with your taxes, so you’ll need to make some changes. You may need to change the amount of your estimated payments or adjust your withholdings so that you don’t unintentionally end up with unpaid taxes at the end of each tax year.

If you’re thinking about pursuing an Offer in Compromise, it’s important to think about the financial investment it requires, the amount of time you’ll spend waiting for an answer, and the high likelihood of rejection. While it can be a suitable tax relief tool for some, it isn’t always the answer. That’s why it’s important to work with a tax professional who can help you explore all of the tax relief options available to you and decide which path forward best suits your needs. Set up a free consultation with Timothy S. Hart Law Group now by calling us at 518-213-3445 or reaching out online.

Frequently Asked Questions

What are the risks of applying for an Offer in Compromise?

When you apply, you risk losing the money you put toward an application fee and initial payment. You also risk having your private financial information become public once your offer is accepted. Finally, you risk defaulting on your offer if you are not compliant with tax requirements for the next five years.

How does an Offer in Compromise affect future tax refunds?

It only affects the tax refund for the taxes due prior to the acceptance date; future tax refunds are not affected.

Why might the IRS reject an Offer in Compromise?

They may reject your Offer in Compromise if they believe that you have enough equity or valuable assets to pay, if your income is high enough to qualify for another payment arrangement, or if you are behind on tax returns or quarterly payments.

What financial information does the IRS require for an Offer in Compromise?

Think about any possible piece of financial information you can imagine—the IRS likely requires it for an OIC application. This includes your income, your spouse’s income, all of the assets you own, information on the equity for all of your assets, household expenses, debts, and future assets you may own.

Can filing for an Offer in Compromise impact my credit score?

Applying for an Offer in Compromise will not affect your credit score.

What are the alternatives to an Offer in Compromise?

Potential alternatives include an installment agreement, partial payment installment agreement, and currently not collectible status.

How long does it take to process an IRS Offer in Compromise?

Plan on the process taking at least six months, but potentially a year or more.

What happens if my Offer in Compromise is rejected by the IRS?

You have the chance to appeal their rejection; be prepared to provide significant documentation for each item you disagree with in their rejection.

Are there any privacy concerns with filing an IRS Offer in Compromise?

Yes. If your OIC is approved, anyone can request a brief overview of your offer and the reason it was accepted.

How can I ensure compliance after an Offer in Compromise is accepted?

You must file all tax returns on time, pay all required estimated tax payments, and pay any new federal taxes due before their due date.