The latest IRS Factbook is out, and among the interesting bits of information is that the IRS or Federal tax offer in compromise program grew in many ways from 2011 to 2012. Interesting is that not only did the number of requests for offers rise but so did the acceptance rate (see below, figure 1.2 below).
Growth in Offer In Compromise Acceptance Rate and Submissions
The acceptance rate for the IRS Offer In Compromise program increased 3.60% to 37.5% for 2012. This marked a 10.63% increase in the growth of the acceptance rate from 2011 (see figure 1.1 and 1.2). Moreover, while the number of submissions grew by 8.47%, the number of OICs accepted grew by 20%.
These changes could be the result of a still shaky economy coupled with the IRS’s revamped Fresh Start Program in 2012, which included changes such as:
- modifications to the future income calculation
- inclusion of student loans, state and local delinquent tax payments into allowable living expenses
- changes to how dissipated are considered
|# of OICs Received||OICs Accepted||Acceptance Rate||$ Amt of OICs Accepted|
|% Change (Δ)||8.47%||20%||10.63%||26.97%|
What is an Offer in Compromise?
An offer in compromise, although rarely accepted, is a way for you to pay less than you owe to the IRS if you are experiencing economic hardship. If you have a large tax liability, an offer in compromise can help you make it more manageable.
Realize, though, that an offer in compromise doesn’t guarantee that you will see your desired outcome. In 2011, there were 59,000 offers in compromise, and 20,000 were accepted. In 2012, 64,000 offers in compromise were made, and 24,000 were accepted. So, even though there was an increase of 5,000 offers in compromise between 2011 and 2012, only 4,000 more were accepted.
And, as you can see, less than half of the offers made are accepted by the IRS.
Eligibility for an Offer in Compromise
The IRS will only accept your offer in compromise if there is a small likelihood that it will receive the full amount from you. In order to be eligible to make an offer in compromise, you need to be up-to-date on filing your tax return and making your payments. Taxpayers involved in an open bankruptcy are not eligible to file an offer in compromise.
When making your offer, it’s important to carefully consider what you can pay. The IRS will take the following four items into account when deciding whether or not to accept your offer:
- Ability to pay: Your overall ability to meet your tax obligation will be considered.
- Income: If you have income, the IRS will consider whether or not you could reasonably set up an installment plan to pay the entire amount.
- Expenses: Your regular expenses will be considered — including an assessment of how reasonable and necessary they are.
- Asset equity: The assets you have will be scrutinized by the IRS to see if you are holding back on whether or not you can truly pay.
When you make your offer, you can choose to pay a lump sum, or you can offer to make a regular payment for a set period of time. If you want to make a lump sum payment, your offer (Form 433-A) should be accompanied by a 20% “down payment.” There is also a non-refundable application fee — currently $186 — with the offer in compromise. Only by demonstrating that you qualify for Low-Income Certification can you avoid the application fee.
Really consider whether or not you truly can’t pay the full amount you owe before submitting your offer. If you do submit an offer, make sure that you are honest about the amount you can pay. Since more than half of the offers made are rejected, it’s important that you truly meet the requirements. It is highly recommended that you leverage a lawyer, CPA, or enrolled agent who has experienced with Offers in Compromise as the process can be complex and tedious.
Watch Out for Scams
Be on the lookout for scams related to offers in compromise. A scammer might pose as a tax preparer and tell you that you can get out of paying your taxes with an offer in compromise. The scammer takes your money, fills out the form for you (so it looks legit), and then disappears. When your offer is rejected, you are out the money — and you still owe taxes (and possibly penalties).