First Person: Filing an Offer in Compromise With the IRS

When facing off against a debt owed to the IRS, the situation can be intimidating even for those experienced in negotiation. The IRS has the power to garnishee wages, post tax liens and even seize personal property. There are commercials all over the airwaves from companies promising to settle your tax debt for pennies on the dollar. You may even be at the point of considering just ignoring it and hoping it will go away, but that is always the worst of your available options.

One solution to settling your outstanding tax debt is filing an Offer in Compromise with the IRS. This is one of the last possibilities open to a taxpayer and should be considered only once all other avenues have been exhausted. If your tax attorney starts talking about filing an Offer in Compromise without discussing other options, it is a good idea to seek out a second opinion from another lawyer.

What is an Offer in Compromise?

An Offer in Compromise (OIC) is a mechanism offered by the IRS to assist those with large tax debts who do not have the resources to pay their entire debt. An OIC is a settlement offer that you present to the IRS suggesting a total repayment amount and timeline. The IRS does not accept all OICs and, in fact, only about 16% are successful. However, if you simply can't pay all of the tax debt back in a reasonable time and can prove that you have a low net worth and low income, an OIC may work to help you clear your IRS debt.

What are the steps in filing an Offer in Compromise?

An OIC should not be entered into without the assistance and advice of an experienced tax attorney. He or she has the knowledge and skills necessary to have an idea of what will be acceptable to the IRS and what is reasonable for the taxpayer. A tax attorney should discuss all of the available options with you before filing an OIC because the success rate is low.

An Offer in Compromise requires the filing of several forms along with a $150 filing fee (plus any charges from your attorney). You will have to thoroughly disclose your income, assets and debts to the IRS to prove that you are unable to repay the tax debt within the statutory period.

While you should not file an OIC prematurely, it is also a good idea not to wait too long. Certain existing tax liens cannot be cleared with an OIC so you may have issues selling property during the course of the arrangement. However, an OIC application in play prevents the IRS from placing such a lien in the first place.

How long does it take to settle an Offer?

It can seem like it takes forever to go through the Offer in Compromise process. It can take a couple of months to pull together all of the information required by the IRS to file the Offer. Once filed, the IRS can take up to two years to assess and rule on the Offer and another few months to set up the payment plan. During this waiting period, however, your attorney will likely advise you to pay regular payments to the IRS as if your Offer of Compromise was accepted. The OIC will, however, stop further collection action.

The dangers of filing an Offer in Compromise

There are several cautions to be aware of when considering filing an OIC:

-- Be sure to hire a tax attorney who does more than just file OICs- firms that promise you you'll pay "pennies on the dollar" often rake in lots of upfront cash from customers knowing the odds of winning are slim.

-- Make sure that you will be able to pay the settlement terms you are offering. If you renege on the settlement, the IRS can rescind it and reinstate the entire debt all over again (and they will be much less likely to work out another agreement).

-- Be upfront about all of your assets and income. Trying to hide resources from the IRS is likely to end badly and perhaps result in jail time.

-- While paying on an Offer in Compromise, keep current tax returns up to date to meet the conditions of the Offer (and to avoid getting back into the same situation again).

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