Frequently Asked Questions About Offers in Compromise

I’ve been receiving a lot of emails in response to a series about the Offers in Compromise program at the IRS.

Here’s a look at a couple of the most frequently asked questions:

Dear Bonnie,

I owe about $75,000 in delinquent taxes and I’m self-employed, making pretty good money. But with a wife who doesn’t work and a couple of kids, I don’t think I’d ever be able to repay this tax liability. I always hear ads about paying pennies on the dollar, but I wonder if I qualify for this. How much should it cost to have a tax person make an offer in compromise for me, and how do I know if they are any good or not?

-Steve

Hi Steve,

Thanks for writing regarding an OIC. Depending upon the company and the area in which you live, you may find a wide variety of fees for preparing an offer in compromise.

My advice is to be very careful in selecting a tax pro to handle this for you. Because of confidentiality requirements, it’s difficult to acquire references. If you know of someone who was successful in compromising his tax liability, you may want to find out who represented him or her. If you don’t, you’ll have to rely on your own judgment.

When meeting with a pro, ask questions such as: How long have you been in business? Do you have an area of specialty (hopefully representation issues is one area)? How many offers have you presented? How many were successful? What is your fee? You want an experienced pro, who is direct and has the ability to negotiate.

A bona-fide tax pro will qualify you first to determine if you have a shot in hell of being one of those in the 24% accepted category.

You say you may have too much gross income, but that is only part of the equation. The IRS uses a set formula to determine an acceptable offer, a good tax pro knows how to extract the data for the variables of the formula that the typical taxpayer may not be aware of.

Dear Bonnie,

With interest and penalties I believe I owe $90,000 of ‘06 and ‘08 federal taxes plus year to date ‘10 taxes.  I have a couple illnesses (you mentioned this in article).  One is seriously debilitating and periodically impacts income and the other is terminal.  

I spoke to an IRS agent who said they don’t care about the illnesses. They are inclined to put liens on everything (I have nothing – a car, and an almost empty bank account).  Then they will attempt to collect as much per month as they think I can pay. Later they will renegotiate if I’m sicker.  

This agent said OIC is for remaining penalties and interest or when one spouse dies leaving hardship and does not apply to my situation.    

What do you think?  

All the best, 

-James

Dear James,

I think you ran into a bully! Most IRS agents are sympathetic and willing to work with taxpayers who voluntarily come forward to resolve their delinquent tax liabilities.

The logic behind an offer in compromise is this: If it doesn’t look like there’s a likely chance of collecting the debt (including the continually mounting penalties and interest) in the taxpayer’s lifetime, the IRS is inclined to consider an offer in compromise.

I’m surprised the IRS agent you spoke with didn’t suggest you go for it. After all, unless there’s something you didn’t tell me, (like you have an extensive collection of Van Gogh’s valued at $10 million), you sound like an ideal candidate.

A surviving spouse in a hardship situation is an ideal candidate-- but not just for the accrued penalties and interest. In fact, when you apply for an OIC on Form 656, you list the tax years you want to include in the offer. The tax, as well as the penalties and interest, are compromised in an accepted offer.

Other ideal candidates include: unemployed taxpayers with no prospects and a looming statute of limitations on the tax liabilities in question, low income or unemployed surviving spouses (especially those with children), low-income elderly individuals with no assets and self-employed individuals with a track record of low income. Pretty much anyone with no assets, no or low income, mental and physical disabilities have a pretty good shot at compromising their tax bills.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.”  Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.