Strategy 1 – Make an Offer

There are several strategies to consider when it comes to dealing with IRS debt. The Offer-in-Compromise is an option for taxpayers who are simply not in a financial position to pay their IRS debt in full. The IRS will accept less than full pay, but the process of getting that agreement is not easy. But, contrary to the ads on TV, most of the offers are rejected by the government. In fact, only 14,000 out of 45,000 offers were accepted in 2020 as per the IRS’s latest data book.

Offer-in-Compromise Basics:

    • You must be able to prove that your financial situation is such that you are not likely to be able to full-pay the debt.
    • All your tax returns due in the last 6 years must have been filed.
    • Your estimated tax payments and withholding for the current year must be adequate to cover your current year’s tax liability. The IRS will not make an agreement if you are still digging the hole deeper.
    • The offer amount must be adequate. The IRS uses a formula called the “Reasonable Collection Potential” to determine what they will accept.
    • Your offer must include a payment equal to 20% of the offer amount if you are offering a lump sum payment agreement.
    • Should the IRS reject your offer, the tax payments will not be returned.
    • Should the IRS accept your offer, you must stay in compliance for a period of five years. Failure to do this, by say not filing on time or making estimated tax payments, results in the Offer being void. And, no, the IRS will not be returning any tax payments made.
    • The 10-year Statute of Limitations is put on hold while the IRS is considering your offer.

The fact that most offers are rejected is undoubtedly the result of people making offers without understanding the process or the Reasonable Collection Potential formula. This is not helped by the TV ads promising ‘pennies on the dollar’ results without mentioning that you must prove your financial position.

Author: Jim Payne

Jim Payne, a Florida Certified Public Accountant (CPA) since 1976, offers candid insights on getting square with the IRS — with the least pain, and at the lowest cost — with (or without) the help of a tax representative. Mr. Payne is a former IRS agent and expert in business profitability, IRS audits, IRS payroll tax, and IRS non-filer issues. As a Tax Representative, his goal is clear: " I will speak on your behalf to all IRS agents, so you never have to, and I'll guide you in executing a strategy to resolve your IRS problem so you can get back to enjoying life."

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