what you need to know about offers in compromise based on collectibility
1. In order to qualify, your net equity in assets must be less than the tax you owe, and you must offer your entire net equity. This means that in an offer in compromise, if you have assets you must surrender the value of the assets less any secured debt. If your net equity exceeds what you owe, a compromise won’t work. Your net equity in assets is not the same as your net worth. Your net worth is reduced by unsecured debt. Your net equity in assets is not. Therefore it is possible to be insolvent and still have a net equity in assets.
Example: John and Linda Smith owe $100,000 in federal income taxes, including penalties and interest. They own a house worth $500,000 with a mortgage of $450,000. They also have brokerage, checking and savings accounts worth $60,000. The owe unsecured creditors $150,000. Their net equity in assets is $110,000 (500,000 – 450,000 + 60,000). The $150,000 they owe unsecured creditors is not considered in determining their net equity in assets. Even though John and Linda are insolvent, they do not qualify for an offer in compromise because their net equity is assets is more than what they owe in federal taxes.
2. Someone has to lend you or give you money to fund your offer. In an offer in compromise you must pay the value of your net equity in assets plus a portion of your future income. How much of your future income you must pay depends on how quickly you will pay your offer. The faster you pay your offer the less future income you must pay. Because you must surrender your net equity in assets, you won’t have any money to pay the future income component of the offer. Remember, future income is something you don’t have right now.
3. Detailed financial disclosure is required. Applying for an offer requires you to disclose all of your assets, including the locations and account numbers of any checking, savings and investment accounts. This includes money or assets someone is holding for you “in their name.” You must also disclose any assets you transfered to someone else for less than fair market value. Lying on the disclosure is a crime. Even if your offer is accepted, if it’s later discovered that your disclosure was dishonest, the offer can be rescinded and you can be prosecuted.
4. Requesting an offer in compromise gives the Government more time to collect your tax.The statute of limitations on collection is suspended while an offer in compromise is pending.
5. Requesting an offer in compromise may delay your eligibility for bankruptcy. If bankruptcy might be an option for you, consult with a tax attorney before filing an offer in compromise. In some cases filing an offer in compromise may hurt your ability to discharge your taxes in bankruptcy.
6. Penalties and interest accrue while an offer in compromise is pending. Penalties and interest can add a lot to what you owe. These charges add up during while the Government is reviewing your offer in compromise, which can take a long time.
7. You have to pay up to 20% of your offer when you request an offer in compromise. For certain offers (called periodic payment offers), you pay less when you submit your offer, but periodic payment offers also require you to pay a larger portion of future income. In addition, you may have to make multiple payments under a periodic payment offer while IRS considers your offer. The longer IRS takes to consider your offer, the more payments you must make. These amounts are not refunded if your offer is denied. Most Taxpayers also have to pay a non-refundable application fee of $150.
8. The IRS is hostile to offers in compromise. The IRS handles offers in compromise in a manner that, makes it costly to pursue successful offers and tends to deter Taxpayers from requesting offers or continuing to pursue them once made. After an offer is submitted with full financial disclosure and all items requested by IRS published instructions, IRS often requests a lot of additional information. Even when the additional information is provided IRS does not necessarily consider the information properly.
Example: Your employer reimburses you for business expenses incurred as an employee. When IRS reviews your offer, it treats the reimbursement of business expenses as income and adds it to your income. You provide substantiation to IRS proving that the reimbursements are for business expenses and are not income. IRS ignores the substantiation and continues to add the reimbursed amounts to income, causing your offer to be rejected and forcing you to abandon your offer or take it to Appeals. (Example taken from actual case).
Does all this mean you should not request an offer in compromise? No. It means that the law and rules need to be carefully applied to your facts and circumstances, and that all other options should be expertly evaluated and compared before you request an offer in compromise. Hiring a firm that promotes offers in compromise may be an expensive waste of time and may compromise your rights. Anyone who advises you that you should request an offer in compromise before you hire them and before they perform and in-depth review is advising you prematurely and without being fully informed.
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