Does the IRS Really Compromise Tax Debts for Pennies on the Dollar?

If you owed me a dollar, and I decided that in lieu of the buck, I would accept a handful of pennies, then I'm sure you would enthusiastically accept the offer.

Some taxpayers owe the IRS big bucks, and yes, the IRS is willing to compromise the debt and accept a lower amount in certain situations, which once paid, is then accepted as full-payment.

But does the IRS really accept offers based on the percentage of a dollar? Is this "penny-on-the-dollar" approach a program solely available to third-party CPAs, tax lawyers and other professionals? Is there a "one-time settlement" window of opportunity only?

All such settlement phrases refer to one thing only - the IRS Offer in Compromise program. This program has been around for over a decade, with significant changes made in 2006 that are still in place today.

Before we answer the questions above, let's take a look at some startling statistics regarding the filing and acceptance of an Offer in Compromise.

According to the IRS 2010 Data Book, the IRS received 57 thousand offers in 2010. Out of that amount, only 14 thousand were accepted. That's an acceptance rate of only one out of four. Over the last four years, the amount of offers submitted has grown from 46 thousand to 57 thousand, but the rate of acceptance remains constant.

What does this mean? That there is a good chance the IRS will not accept your offer.

The IRS does not review a taxpayer's offer based on the percentage of the dollar, no matter what fancy catch-phrase the tax resolution hawkers want to roll out in infomercials and radio spots.

If a taxpayer wishes to file an offer, the IRS will first conduct a detailed financial analysis. The purpose of this is to determine if an individual is going to be a good candidate for the program. If, after a review of a taxpayer's income verse expenses, the resulting investigation shows an ability to either full-pay using assets on hand, or to make monthly installment agreement payments that will yield a high potential for collection, the IRS will not accept an offer.

In the long run, this is much more cost-effective for you. Why waste time and money preparing an offer that will be denied? There are costs involved to file an offer, payments that must be made while your offer is pending, fees (some of which are exorbitant) that preparers charge to file the offer, and all the while penalty and interest are accruing.

You still have the right to file an offer at any time, but if it already has been determined that it appears unlikely the IRS will accept a compromised amount, then collection and enforcement may continue.

An Offer in Compromise is designed for taxpayers to do themselves. The offer package is simple and straightforward, and explains the three categories under which an offer is filed, as well as the three options for making repayment. There is a $150 application fee, and non-refundable payments must be made while the IRS reviews your offer.

CPAs, attorneys and other third-parties eager to cash in on your tax troubles charge hundreds, if not thousands, to prepare and submit an offer.

Back in 2004, the IRS identified this practice and had some strong warnings. According to the IRS article entitled Check Carefully before Applying for an Offer in Compromise, the IRS "issued a consumer alert advising taxpayers to beware of promoters' claims that tax debts can be settled for 'pennies on the dollar' through the Offer in Compromise Program."

The article said that "Some promoters are inappropriately advising indebted taxpayers to file an Offer in Compromise (OIC) application with the IRS. This bad advice costs taxpayers money and time."

For information on the filing of an Offer in Compromise, go directly to the IRS web site and review their Offer in Compromise page.

More from this Contributor:

10 things you didn't know about the IRS Offer in Compromise program

When to file an Offer in Compromise with the IRS

Is it worth it to use a debt consolidation company for tax relief?