The Truth About the Offer in Compromise Program
The Offer in Compromise (OIC) program offered by the IRS is currently one of its most popular tax relief settlement programs. It is also the subject of much marketing by tax professionals who help consumers resolve their tax issues. I’m sure you’ve seen or heard the advertisements. “Settle your IRS debt for pennies on the dollar!” “Don’t pay the IRS more than ___ percent of what you owe!” These advertisements are ubiquitous on both tv and the radio these days, and anyone with a tax lien will have been swamped with a tidal wave of companies promising to help them get into the program.
Offer in Compromise Numbers
Let’s take a deep breath and look under the hood of this program to see how it works. Before we do that, I’m going to give you the numbers on the OIC program. The real numbers, which can be found in Table 16 of the Statistics of Income Bulletin published by the OIC, are real eye openers if you’ve been promised an OIC by someone. The latest edition of the SOI shows that 7.1 million tax collection cases were settled. That’s a lot of back taxes! How many of those were settled through OIC? 27,000.
Let me repeat that: 27,000. That’s how many taxpayers successfully settled their tax debts through the OIC program. If you do the math, that’s less than 0.5%. Furthermore, if you look into the numbers further, you will find that over 60% of taxpayers who filed for an OIC were rejected from the program. This means that less than one percent of all taxpayers qualified for the OIC program, and over half of those who were qualified were rejected from the program.
What does this mean for those of you who owe a significant amount in back taxes? It means that most of you won’t be able to get an OIC. It also means that anyone who is promising that you’ll qualify for and be accepted into the program is trying to sell you a bill of goods. Don’t fall for it!
How the Offer in Compromise Program Works
First and foremost, the IRS does not care about how much you owe when they decide whether or not you are qualified for an OIC. It doesn’t matter to them if you owe $2500, $25000, or $250,000, and what they will allow you to settle the debt for is NOT a fraction of what you owe. If someone says it is, run, do not walk away. What does the IRS look at? Your income, expenses, and assets, just like any other creditor.
To get a rough estimate of your eligibility, add up the value of all of your assets. This includes your home, business equipment, cars, cash on hand, retirement savings, etc. If your total assets are more than your IRS debt, then chances are that you do not qualify.
If you pass this test, take a look at your income and expenses. The IRS does not allow you to deduct all of your household expenses; you can find the allowable expenses here. Take the difference between your household income and expenses and multiply it by 12 or 24 to find out what your minimum cash offer much be in an OIC application. You must also add in any amount in equity in your house and/or cars. If this amount is more than your debt, or if you can’t come up with this amount in cash, you aren’t eligible for the program.
Let’s assume you are eligible for the program. You still must apply and be accepted. After that, you must file all tax returns and pay all taxes on time for the next 5 years, or your OIC acceptance will be rescinded and the IRS will again come after you for the full amount. They will also intercept any tax refunds you have due while they are considering the OIC application, so try to get it turned in at least 6 months before your tax return is due if you are expecting a refund.
Filing an Offer in Compromise application is a complex process, and if you choose to hire representation, make certain whomever you hire is competent and reputable. Many firms have gotten in trouble for selling taxpayers on OIC services (which are generally more expensive than other representation services), then converting the unfortunate client to an installment agreement and not refunding the difference. Ask detailed questions about how the practitioner knows you are eligible for an OIC and what will happen if you are turned down.
Alternatives to the OIC Programs
If you don’t qualify for an OIC, don’t despair. There are a number of other options available to you, including installment agreements and currently not collectible (CNC) status. There are also other ways to reduce your tax debt, such as by filing corrected tax returns or applying for penalty abatement. If you want help with your tax debts, contact a licensed professional.