An Overview of the IRS Tax Collections Process for Non-Tax Lawyers
24. How Offers in Compromise Are Considered
Let’s talk a little bit for a second about Doubt as to Collectability Offer in Compromise, the successes and the more common ones. So, Doubt as to Collectability Offers in Compromise fall under a specific set of guidelines.
Doubt as to Liability Offers in Compromise are based on a formula that is the quick sale value to find by the IRS at 80% of the value of the taxpayer’s assets plus the positive monthly cash flow times 60 months.
If a taxpayer is showing $10 and positive monthly cash flow over 60 months, that’s $600. A hundred dollars a month in positive monthly cash flow, that’s $6,000. A thousand dollars a month in positive monthly cash flow, that’s $60,000.
Positive cash flow is really important from an Offer in Compromise standpoint because little changes in the positive monthly cash flow of the taxpayer really affect the minimum offer amount that the IRS will accept.
When determining whether your client is an Offer in Compromise candidate, one of the best things to do is ask the client what assets do you have? List out the assets that they have, determine what their value is, meaning not with the client’s assessed value is but with the quick sale value of the client of the asset is. Then, take those assets and list the client’s income and expenses out, and figure out what their positive monthly cash flow is if any and then, that gives you an idea of what their minimum offer amount is.
That’s a really great trick to pre-screen Offers in Compromise. We have a policy in our firm of pre-screening offers and compromises even before we get ready to submit to them to the IRS.
By pre-screening them we tremendously increase our offer acceptance rate because we receive the minimum offer that has a very strong likelihood of being accepted.
One thing I want to point is that Offers in Compromise are not based on the amount owed. They are based on the taxpayer’s reasonable collection potential.
While it seems incredulous that a taxpayer might be able to settle a liability that is hundreds of thousands even millions of dollars for a very small amount, I can assure you it happens all the time.
Some of the personal success stories for our firm. We had a $2 million liability which we settle for a $5,000 offer in compromise. We had an $850,000 liability, we settled that for $15,000.
The reason I illustrate those kinds of extreme examples—those are not the norm. But, the reason I illustrate those examples is that the IRS wanted those huge discounts based on the realistic threat that they may not get anything in the future.
So, tell the client to throw the liability out the window and really spend your time focusing on what the client can reasonably afford to pay the IRS. That is the best indicator for an Offer in Compromise.