More on “Qualifying” to File an Offer-in-compromise

Most folks think that if you file Bankruptcy, you can get a better deal with IRS when you open negotiations with them. But the truth is, IRS won’t even talk to you while you’re in bankruptcy. In fact, they have a whole separate division back in Pennsylvania to deal with folks with tax issues who are in bankruptcy. And good luck finding their number!

So if you read my last blog, it was pretty weighed down with details about qualifying to file an Offer-in-Compromise with the IRS. Today we’re going to continue in that vein, but if you thought this was going to be exciting, you’re going to be even more depressed than you were on Monday. Okay, on that cheery note, let’s dig in.

You can’t be in bankruptcy and submit an offer-in-compromise. It won’t matter how many pink boxes of Voodoo donuts you bring from Portland, Oregon, either. (They will eat the donuts, but they won’t talk with you otherwise….)

You also have to file ALL your tax returns. Forgot one in 1978? Guess what? (Remember how much you made in 1978?) Okay, not 1978, since there’s arguably a statute of limitations issue, but the point is that if you have unfiled returns, you will need to be getting those together and filed to be able to submit an offer in compromise.

You also have to have all estimated tax payments made for the current year. Strange that they would require you to make all payments in the current year when you have a huge debt hanging over your head with them, right? That’s what I thought, initially, until I realized that what they are looking for is that you not only know how to be in compliance but that you will. You have to show them that you can do it!

Now if you’re an employer (business owner with employees), you have to have all your federal tax deposits for the current quarter paid up. You’d be surprised to discover how many employers haven’t paid their withholding tax, and this is a huge thing with IRS. They get a bit snarky about it since they view failing to pay withholding tax as tantamount to stealing their money (they see it as you holding their money, so…..) It may be tempting to rationalize it away like “but I need to pay XYZ vendor in Portland, Oregon” or “But my wife NEEDS that spa vacation in Maui”…wait, what? No, delete that last one. Most small business owners in Portland, Oregon that I deal with don’t quite see it as holding someone else’s money, but rather (innocently enough, I should add) see it as an opportunity to keep the business healthy and they can get the IRS later. No, not really. Make that payment—or as much of it as you can, especially if you want to try to negotiate a little deal on your back taxes with IRS. Like I said above, they need to know that you can straighten up and fly right, even if for just a little while. (They’re hoping it’ll become a habit)

One last thing—I’m keeping it short today as I don’t want to overwhelm with mundane information—but you need to pay a filing fee of $150, which must be submitted with your offer. Now, for most folks, that’s a stretch considering you also have to make an initial payment with your offer, and if you’re offering a payment plan, that payment must be a minimum of 20%! So, some folks find themselves quickly drowning just to get the offer in compromise on the desk of some overworked IRS Offer Examiner. There’s two exceptions to the filing fee requirement: First, if you’re below 250% of the federal poverty limit, you don’t have to pay. Second, if there is doubt about the legitimacy of the tax debt (“doubt as to liability”), you don’t have to pay the filing fee either. This raises an interesting question, and that is if part of the offer is based on doubt as to whether what is owed is collectible and the other part is based on “doubt as to liability”, can the whole fee be waived? I argue yes, but I usually don’t get those clients….