How the IRS Has X-ray Vision on Offers in Compromise

How does the IRS have “X-ray Vision” when considering Offer in Compromise requests?  Well, the IRS can look at recent Form 1099s filed under the taxpayer’s account.  So, the IRS will then be asking what happened to certain bank or investment accounts which reported interest or dividend income in prior years (did the taxpayer dispose of those assets fraudulently, for example?)

Dissipation of Assets in an Offer in Compromise

Yes, if you are seeking an Offer in Compromise and have borrowed against a retirement account or investment account in recent years, then you should be prepared to answer questions from the IRS Offer in Compromise examiner about what you did with the account proceeds.  If you used the funds to pay tax or student loan debts, then you should be okay.   Yes, you should be prepared to provide bank statements to back up your assertions.    In case you are wondering, the IRS does not like to approve Offers in Compromise.   Do not believe the television commercials about how easily the IRS settles tax debts for “pennies on the dollar.”   In recent years, the actual approval rates for Offers in Compromise has been around 40 per cent.   So, a lot of OICs are rejected, for a variety of reasons, including dissipation of assets.

Investigative Tools that the IRS Uses

Additionally, the IRS also may use tools such as DMV (Department of Motor Vehicle) records to find out about vehicles that the taxpayer owns.  In addition, the IRS uses Accurint, which is a subscription-based cloud software operated by Lexis-Nexis that can investigate property that a taxpayer may own or find out about relatives with whom the taxpayer may be living.

Yes, the IRS Does Pursue Fraud Cases

When you submit an Offer in Compromise, remember that you are signing an oath of truthfulness under the penalties of perjury.   I have written elsewhere about the need for honesty, but the IRS does indeed pursue taxpayers for fraud stemming from phony Offer in Compromise applications.   If the IRS Collections Division believes that you have hidden income, for example, then it could refer you for an audit of past tax years.  More starkly, it could refer a taxpayer to the IRS Criminal Division for a tax fraud investigation.

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