Qualifying for the IRS Offer in Compromise

We’ve had a lot of interest in our last blog post on Offer-in-compromise. Two years ago, the offers in compromise submitted were largely rejected by IRS. In fact, only about 24% were accepted. However, about a year ago, IRS decided to make the program work a little better for more people, so they made it easier for people to qualify.

Initially I was going to write about a paragraph on qualification for another blog post on offer-in-compromise, but when I sat down to outline my thoughts, I realized that “qualifying” from IRS perspective was a whole lot different than qualifying from MY perspective—the attorney/CPA working hard to find the best spot for you to land. So I’m dedicating the whole blog today to “qualifying”….maybe even the next blog, too.

The first thing to consider when “qualifying” (and I’m gonna stop putting that in quotes from here out) is what the IRS requires. You must show the IRS one of three things:
1. You are unlikely to be able to pay your tax debt;
2. Payment of your tax debt would work an economic hardship or be unfair; or
3. There is a legitimate doubt as to the accuracy of the tax debt amount.

Now, with regard to item #1, there is a time-frame that IRS works within called the Statute of Limitations (no, it’s not just for criminals). There’s a deadline after which IRS cannot collect your tax debt—generally about 10 years. So you have to show IRS that within the Statute of Limitations, you are unlikely to be able to pay off the tax debt. The good news is that IRS no longer uses 4 years (or 5 if you propose an installment plan) to determine your income levels — now they are only using 2 years! (Yay!)

So this is the first level of qualification. It seems relatively straightforward but is not always so simple. There are things which make sense to you which IRS doesn’t even recognize as reasons for being unable to pay. For example, a client of ours in Sacramento, California explained that his business had decreased by 28% from last year. For him, money was tight. For the IRS, though, money might be tight right now, but how about within that 10-year Statute of Limitations window? He further explained that his business had lost a big client just outside of Sacramento, California. Again, not really something IRS would give much weight to. His wife, however, had been recently laid off. Now, this is something we can bring to IRS if we can show that this will be a more long-term problem for that family. In her case, her layoff was due to an entire industry shakeout and not just a local, Sacramento thing, and the likelihood of her returning was slim. The family would likely be unable to fully replace her income in the long-term.

Another aspect of looking at your “ability” to pay is your asset base. Does your home have equity? (stop laughing, I know, but I have to ask). How about cars? That rare coin collection? Got an extra kidney? (you can live with just one, you know) Okay, okay, kidneys don’t count but you get the idea here. IRS calculates your potential income AND the salable equity in your assets to determine how “able” you are to repay your tax debt.

With regard to the “unfairness” and “economic hardship” argument, this typically comes up in cases where let’s say you make a 6 figure income. However, recently you had a terrible accident and have become disabled due to a broken back. Or perhaps you have a small child diagnosed with a debilitating disease and your income will likely be consumed with medical and other related bills. Perhaps a homemaker of years and years suffers the loss of her husband, who was the primary income earner in the family. She may not be able to pay much—if anything—towards the large tax debt with which her dearly departed husband left her. These are the kinds of things IRS takes into account when determining if you even begin to qualify (see, no quotes…but I was tempted!)

Personally, although the vast majority of offers in compromise come from the “ability to pay” category, I like the last one the best. Now I’ll just say—because you’ll think it if I don’t — we do everything above board around here. No cheating, not fudging, nothing like that. We don’t need the extra hassle that comes with being shady. But “doubt as to taxability” is a HUGE gray area. Honestly, while most folks are trying to shoe-horn their case as “ability to pay”, I could pull up a couple of legitimate questions as to the legitimacy of the debt itself.

And if not as to the whole tax debt, at least to a portion of it. Now this isn’t true of all cases I handle, but item #3 is there more than most people realize and it’s a great way to qualify (must….resist…) to be able to submit an offer in the first place.

Okay, so you can see how just this simple topic of three items can consume a blog quite quickly, so I’m going to quit for today and see y’all on Thursday with more on qualifying from the IRS perspective. Next week we’ll discuss what I go through when we talk about “qualifying” (okay, the quotes are entirely appropriate here, no?)

I think what you’ll find here when we’re through is that there are many aspects to this simple program, and each aspect can be crucial in how you handle yourself in the big picture.

Sometimes you can shape each little thing and then piece it together as a whole to be most advantageous to you, but you have to be careful to consider how each piece fits with the others and with the bigger picture overall.

It reminds me of the age-old question—How do you eat an elephant?
One bite at a time!