IRS Offer in Compromise–10 Questions about Settling Your IRS Tax Debt

IRS Sign

1)   Are IRS Tax Settlements legitimate?  Why would the IRS ever agree to a reduced payment on IRS debts?  

ANSWER:  Because the IRS makes money on the program!  For example, in 2012, it received over $175 million in payments from taxpayers in the Offer in Compromise Program.  Moreover, the Program encourages taxpayers to again become compliant with filing their tax returns on time.

2)  What forms should I expect to submit?  

ANSWER:  The IRS wants to see copies of at least 3 months of bank statements, investment statements, utility and loan statements, as well as paystubs.  The IRS will require the completion of Form 433, which is a detailed financial disclosure document, as well as Form 656, which is the actual Offer in Compromise form.

3)  I am confused about the IRS’s Fresh Start Initiative.  Is that something different?

ANSWER:   Since the financial crisis of 2008-12, the IRS has implemented various changes within its Collection Division to enable more taxpayers to repay their tax debts.  These changes are known as the Fresh Start Initiative.   Parts of Fresh Start do indeed pertain to the Offer in Compromise Program, which relates to settling tax debts.  Other parts of Fresh Start pertain to things such as entering into Installment Payment Agreements as well.

4)  How long does it take the IRS to evaluate my Offer?

ANSWER:  Offers are submitted in writing to the IRS where specialized reviewers evaluate the documents and determine whether the offers should be accepted.  This process takes between 6 to 9 months on average.

5)  What is the likelihood that the IRS will accept my Offer?

ANSWER:  The IRS states that is approves approximately 40% of all Offers.  This percentage has risen in recent years.   Analysts have speculated that the acceptance rate is somewhat low because some national tax resolution firms (you’ve probably seen their infomercials) submit offers that are not credible.

6) I have a friend who only paid $8,000 to settle a $60,000 tax debt.  Will the IRS agree to those terms with me?

ANSWER:  It totally depends on your assets and your income.  Those are the two pools of money that the IRS considers with Offers in Compromise.  So, it could be that your friend had no home equity and little income.   If your financial situation is different, then you can’t expect the same outcome.  It is all very fact-specific.

7)  I just want to settle my tax debts like I’ve settled my credit card debts.  Will the IRS agree to that?

ANSWER:  No, the IRS Offer in Compromise program is not like other debt settlement programs.  The other day, I had a client with a $6,500 credit card debt;  I contacted the debt collector and within one minute, we had a deal to pay them $2,000 as payment in full.   The IRS does not make deals like this.   The IRS has its own rule-book (The Internal Revenue Manual) with its rules and regulations to follow.

8)  I have two years of un-filed tax returns.  Can I still do an Offer in Compromise?

ANSWER:  No, you will have to get your returns filed.   Hint:  don’t worry, a tax professional can help you track down your income information and get your returns filed faster than you might think.  But the IRS requires that you become compliant with all un-filed returns before it will accept an Offer in Compromise.

9)  What are some other disadvantages to doing an Offer in Compromise?

ANSWER:  The IRS requires Offer candidates to make a 20% down payment when submitting an Offer in Compromise.   In other words, if your Offer will be $10,000, then you must submit a $2,000 payment along with your Offer forms.  This payment is non-refundable and will not be refunded if your Offer is rejected.

Another disadvantage is that you must file all of your tax returns on time for the next five years, and make all required tax payments along with the returns.  Otherwise, your Offer could be revoked if you lapse on your future obligations.

10)  What are my legal rights if the IRS rejects my Offer in Compromise?

ANSWER:  You can appeal an IRS denial of your Offer in Compromise.   You can then an IRS Settlement Officer (with a fresh set of eyes) to review your Offer, and you will have a second chance at being accepted.   So, don’t despair if your Offer is rejected.

If you have other questions, please comment below!

2 Comments on “IRS Offer in Compromise–10 Questions about Settling Your IRS Tax Debt”

  1. Nice article. The public needs to be made aware of those “tax settlement ad firms” taking advantage of desperate people. I think the ads are misleading. Why anyone would use one of those TV firms instead of a real attorney with offices in Pittsburgh baffles me.

    1. Jim, that is exactly right. It’s similar to the outfits that have been doing “mortgage modifications”. They find their clients via the Internet and prey upon them. Take care,
      Shawn Wright

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