As a refresher to the reader, an IRS Offer in Compromise is a tax settlement with the IRS where the taxpayer agrees to pay a specified sum and the IRS agrees to compromise on the remaining liability.
Many people have seen the various national tax agencies on daytime television offering to settle your tax debt for pennies on the dollar. However, what is left out of their sales pitch is that nearly 80 percent of IRS offers in compromises are rejected for a variety of reasons. This is not entirely a bad thing, but requires some strategic planning on the part of the taxpayer.
First, you should have received a detailed letter from the offer specialist at the IRS who was assigned to your IRS offer in compromise. So take a look at that letter to determine why that offer was rejected. Keep in mind that a rejection of an Offer in Compromise and the return of an Offer in Compromise are not the same thing.
Offer in Compromises can be returned for a variety of reasons whether they are procedural, clerical or administrative. A bankruptcy filing, failure to include the entire application fee, missing information, additional liabilities being accrued while the offer is being considered, and many other things may all cause your offer in compromise to be returned.
Unlike rejection, there are almost zero appeal rights for a returned Offer in Compromise (other than pleading with the offer specialist). However, there is nothing to prevent you from resubmitting the offer once the deficiency has been corrected. Returned Offer in Compromises are also an expensive, but valuable lesson on the importance of filing good paperwork with the IRS.
If everything was submitted properly and your offer truly is being rejected, it is time to take stock of the situation. First, check to see if the offer specialist concluded that your reasonable collection potential (based on the IRS financial formulas) exceeded your stated minimum offer amount? If so, double check your initial offer submission (please tell me that you kept a copy) to verify that your financial statement was filled out to your maximum benefit?
Did you get the most benefit out of your allowable expense categories? Did you overstate your income? Are your asset valuations accurate? If not, it may be better to withdraw your offer in compromise and resubmit it. The IRS will not keep record of a withdrawn offer in compromise, but a rejected one will count as a strike against your record — especially if the reason it was rejected was not corrected.
There are two possibilities here. First, compare the calculations of the offer specialist to your calculations and see where they differ. Do you have a fight? If not, there’s little hope that the appeals division is going to accept your IRS offer in compromise out of the kindness of their hearts.
If the revised offer amount that the specialist is proposing is reasonable, perhaps you are better off taking it and running. Think about it: there are still tax savings to be had with any accepted offer in compromise, even if it is not for the amount that you hoped for.
Think you are going to have trouble paying the revised offer amount? Maybe the specialist will consider switching you over to more manageable payment terms. After all, the IRS does have an incentive to accept your offer as some money to the government is better than none.
Last Chances at the Offer Specialist Level
What if the offer specialist did change something in their calculation that caused the offer to be rejected and you disagree with them?
First, try talking to the specialist directly and try to persuade them to reverse course. Ideally, this should have been done before the rejection letter went out, but sometimes you can save an offer from the ashes with a little finesse and a good argument.
Offer specialist still not budging? Try talking to their manager. At this point, if you have hit a wall, you have nothing to lose by taking a shot to convince their higher-up. Just be warned: managers are busy and often have a heavy bias toward their people. Most of the time, they would rather back up their people and have you win in appeals (where it becomes someone else’s problem) then to potentially upset the person that they have to see every day.
However, sometimes you get lucky and occasionally you can get one approved, especially if the position advanced by your offer specialist is ridiculous. It is the manager who needs to sign off on these things anyway.
Moving on to the Appeals Division
Suppose you are at the point where you have no more room to argue at offer specialist level. It is officially time to file that appeal and get your offer reconsidered.
Keep in mind that you appeal must be filed within 30 days of the date stamped on the rejection letter. If the IRS does not receive it, you will lose your right to an appeal with the Appeals Division.
Here is the good and the bad news about Appeals.
First, the bad news.
- Appeals officers are usually more senior IRS employees
- They usually have a good knowledge of the offer in compromise program (some are former offer specialists)
- They will almost certainly have a better understanding of the tax code than the offer specialist
- They will have the full case file from the offer specialist
- They are going to rely on their findings of the offer specialist as a default position unless there is something truly erroneous
Do not expect them to recalculate anything. Also, generally speaking, appeals officers are pretty busy people. They will have a limited amount of time to devote to the matter and most will tell you straight up what their intention is during your appeals conference.
Benefits of the IRS Appeals Division
So, I know what you are thinking. You say to yourself, “So, I am generally dealing with a more experienced person at the IRS who is not going to devote much time to my case file and who may be more inclined to fall back on the default position of the offer specialist … Where is the good news in that?”
Fear not. There are several advantages to dealing with an appeals officer.
First, I have found the appeals officer generally has more latitude to reach a settlement on an offer in compromise. The focus of the appeals office is often to settle controversies prior to litigation and I have found that appeals officers often come into a matter with a mindset to settle it.
In addition, because appeals officers have a more mediatory role, I have found that the discussions on issues in appeals are a lot less adversarial than on the offer level. Although it depends on whom you are assigned to, I have found that the appeals officers are more likely to work with you on certain points.
Offer specialists, on the other hand, often will have to justify accepting an offer to their manager. While it rarely happens, I have seen instances where the offer specialist has tentatively approved an offer in compromise only to have it rejected by their manager.
Furthermore, since they often carry a large caseload, they have little time to spend dissecting the merits of each individual case and often will not fight with you over minor issues.
In fact, generally speaking, appeals will limit the discussion to any issues that you raise during the appeals conference.
Finally, because of their seniority, if appeals officers see from the case file that your position is clearly the right one and that your offer should be accepted, they will often just push the offer through without the need for a formal appeals conference.
Their experience often exposes them to many different controversies and if your arguments are credible (as they should be since you are appealing), they will often fast track the resolution of your offer in compromise.
Tips for a Successful Offer in Compromise
Many offers in compromise applications are returned because they are incomplete. The IRS cannot process an offer if it is missing elements specific to applications and related documentation. To be eligible, all filers must not have an open bankruptcy case, must have filed all federal tax returns at issue, must have filed payroll tax returns and deposits at issue for the last two quarters, must pay the required application fee ($150), must complete and submit Forms 656, 433-A, and/or 433-B (if necessary), and must be current with estimated taxes and income tax withholding for the current year.
The most important tips for a successful OIC is to pay the offer amount; file all tax returns on time; allow the IRS to keep any tax refunds, payments, and credits to reduce your tax liability; and continue to let the IRS keep any tax refunds payable to you even after the OIC is approved.
Lastly, choose a tax professional to help you with the offer in compromise requirements. Because of the complexity of the process, taxpayers often hire a tax professional knowledgeable about the dynamics of the program. You want a tax professional who is experienced and knowledgeable about this area of tax law and truly understands your OIC requirements.
In conclusion, despite some of the advantages of going to appeals, it is always better to try and resolve an offer in compromise before you get there.
Successful offer in compromises begin at the preparation level by putting together a package that is well-organized and gives the IRS every opportunity to accept your offer in compromise. If you are assigned to an offer specialist, do everything you can to get your offer in compromise resolved at their level.
Be communicative with them and try to engage in negotiations prior to them rejecting your offer. Often it is much easier to get an offer accepted prior to them rejecting it than to save an offer when a rejection letter has already gone out.
When an offer is rejected though, it is not the time to despair. Carefully evaluate the position of the offer and what you can do to strengthen it to make it more favorable to the IRS. If need be, then you can either withdraw it or take the matter up with Appeals.
Offer in compromises are often difficult to get accepted, but by utilizing some of these best practices, I hope that this will increase your chances of acceptance.