If you've got a lot of IRS tax debt, an offer in compromise may sound like a miracle. Unfortunately, it is seldom an option for most people.
As a Tax Attorney Specializing in tax debt resolution this is by far the most common question I receive. Everyone sees the "pennies on the dollar" commercials and wants to get in on it. Unfortunately most Taxpayers will not qualify for an offer in compromise and paying a large fee to have one prepared and submitted is a waste of money. For those that do qualify for the Offer in Compromise it is a great way to reduce a back tax debt.
Basic Eligibility Rules
To be eligible for the offer in compromise you must meet the following qualifications:
Have filed all of your personal tax returns. Any business you are associated with as an owner must have filed all of it's tax returns as well.
Be making your current year's income tax payments on time and in full. If you are a W-2 employee this means you are having the correct amount withheld from your paycheck. If you are self employed this means that you have made this year's estimated tax payments on time and in full.
Have a low net equity in assets compared to what you owe the IRS in back taxes. Generally speaking net equity in assets is determined by taking the fair market value of an asset, reducing that value 20% to a quick sale value and then subtracting any amount owed to prior secured creditors. Your net equity in assets is the starting point for any settlement with the IRS through the Offer in Compromise program. If you have $50,000 net equity in assets and you owe the IRS $50,000 you are not an offer in compromise candidate.
Have a minimal monthly disposable income under IRS collection standards. The IRS will request much financial information from you to determine your gross monthly income. They will then subtract from that "IRS allowed expenses" which are maximum amounts allowed for each expense category based on where you live and the size of your household. Any amount left over they label "disposable income" and multiply it by 48 to 120 months depending on which Offer repayment plan you choose. If you show $100 in disposable income and you elect to the short term defferred payment option they will add $6,000 in future income to the net equity figure.
It's a Complicated Process
Sound confusing? It is. It has taken me ten years and hundreds of offer in compromise negotiations to feel like I have a complete understanding of the program. Even if you have the simplest of financial situations (zero assets and barely any income) you should at least consult with a professional before trying an offer in compromise on your own. It's much like submitting an insurance claim in that the IRS offer in compromise investigator's job is to find a reason to reject your settlement proposal. You have to know the rules inside and out and be very persistent. More than 80% of offers in compromise will be rejected for this reason or the fact that the Taxpayer submitting the offer in compromise is just not qualified for the program.
If you want to know for sure if you qualify for an offer in comrpomise I welcome you to send me an e-mail at john@cotaxattorney.com or give me a call.