If you have an insurmountable debt and cannot pay your debt in full, you may want to consider submitting an offer in compromise to the federal government. An offer may seem like a easy solution; however, you should carefully weigh the pros and cons of submitting an offer before proceeding with one.
What is an Offer in Compromise?
An Offer in Compromise (OIC) is a program offered that permits the government to accept less than what is owed. Typically, the Internal Revenue Service will either approve or reject your OIC based on two main factors:
- Income (and potential future income)
Your OIC has a better chance of acceptance if your income and assets will not cover your tax liability. However, if you possess sufficient assets to cover your tax liability, the IRS will reject the OIC. Therefore, it is very important to properly analyze your financial situation before jumping into an offer in compromise.
What happens when an Offer in Compromise is rejected?
A bad offer will only further extend the time period that the IRS has to collect the tax debt. (When you are in OIC, the 10 year statute of limitations to collect the tax debt is suspended by the IRS.) Additionally, interest and penalties will continue to accrue. Your case will be sent back to the Collection Division, which will require the establishment of a payment plan.
What You Should Know About an IRS Compromise
When you submit an Offer in Compromise, the IRS will not engage in enforced collection action. Most offers are typically reviewed within one year from submission. If the IRS does not review or decide on your offer within two years, the offer is automatically accepted.
The IRS is most likely to accept an offer if the taxpayer shows he/she has limited collection potential. The offer may be attractive to the IRS who is concerned with the cost of managing a case that is not going to result in much collection.
Many firms promote the OIC program to unqualified taxpayers. It is important to realize that both the approval process and calculation of the specific offer amount can be complicated and time consuming. In addition, if the OIC does not have grounds for acceptance, the taxpayer will incur additional interest and penalties. Even worse, the time period for the IRS to collect the debt will be extended, and the option to discharge the taxes in bankruptcy can be delayed.
Our firm is frequently contacted by new clients who were incorrectly advised by unqualified professionals about an OIC. Most commonly, these “firms” charged exorbitant fees to taxpayers who were otherwise unqualified OIC applicants. Though submitting an offer in compromise sounds tempting and can be a great option, it is very important to exercise caution before you decide to go forward with the process. For more information about an OIC, please call 1.800.777.3800 or contact TaxFirm.com.