When people first hear about the IRS Offer in Compromise (OIC) Program, (depending on where they hear about it from), many common misconceptions may come with it. So, I am here to clear up some of the most common myths about the OIC Program
Myth #1 – The OIC Program is a scam or “too good to be true”
There are usually two extremes that people go to when you ask them what they think or know about the OIC program. This myth is on one end of the scale. (We will cover the other extreme in the next section). People often immediately (and falsely) assume that the OIC Program is a scam. I will admit…there are several “tax resolution” companies out there who do use the program to scam innocent people by promising potential clients that they will get them an Offer in Compromise (and settle for pennies on the dollar) before even looking at their financials. While that is all codswallop, the program itself is NOT a scam. The IRS has 10 years to collect a tax debt from a taxpayer. And they certainly do not want to spend that time trying to collect a tax debt that the taxpayer simply cannot pay. They also do not want to cause undue hardship by demanding someone pay their full liability if they cannot afford to do so and still meet their basic living necessities. So, they are willing to work with taxpayers to get at least some of what is owed to them. It makes the most economical sense to the IRS if they ever want to see any of that money.
Myth #2 – You will only have to pay the IRS 10% of what you owe
This is the other extreme people go to when they hear about the OIC Program. And it is not their fault. There are droves of “tax resolution” companies out there who promise the moon but can’t deliver. They will say ANYTHING to get you to sign on the dotted line. They even make promises in their advertisements and commercials. Let me clear this up here and now. There are certainly cases where it is true (Ayar Law has gotten their fair share of offers where the client only had to pay 10% or even less) BUT it is not that common, and more importantly….cannot be guaranteed by anyone…..especially if they haven’t even seen your financials. Whether or not (and for how much) an Offer is accepted, depends on a mathematical formula. And even after all that…the IRS can still come back and counteroffer or even reject it altogether.
Myth #3 – “I should submit an Offer in Compromise as soon as I am notified of my outstanding balance.”
While it is definitely beneficial for you to submit the offer sooner rather than later…there are things you need to do before you submit an Offer. For instance, you MUST have all your missing returns filed. If you skip this crucial step, the IRS will just send your application back to you. That is why it is of the upmost importance that you get all your ducks in a row before submitting the offer. And don’t forget to attach all the necessary documentation to substantiate your income, assets and expenses as well. Otherwise, they will not accept your offer.
Myth #4 – You must be a good negotiator to settle your tax debt with the IRS
Getting an OIC approved is not a reflection of how good you (or your representative) is at negotiating. Like I said before, it is based on a mathematical formula. So, don’t make the dangerous assumption that you can lowball the government and just go back and forth with them until you guys reach an agreement. It does not work that way.
The formula the IRS uses takes into account your income, assets and allowable expenses. And yes…you will have to provide extensive documentation to substantiate all of this. The government is not stupid and won’t just take you at your word. Based on this information, you throw out a number to the IRS which they can then accept, deny or counter. If you do the math properly…you or your representative should come up with the same number (or close to it) that the IRS finds to be a reasonable amount for you to pay.
This is where a tax professional – especially a tax attorney – can be extremely useful. They know the standards the IRS uses, and which expenses will or will not be approved. They will also prepare all the necessary documentation and do all the tedious work that goes into an offer (and trust me when I say….it is TEDIOUS).
Myth #5 – Submitting an Offer in Compromise will stop penalties and interest from accruing
False. Penalties and interest will continue to be tacked on to your tax debt while the Offer is being reviewed. But…it is true that the IRS will not levy your accounts or garnish your wages while your Offer is being processed (which can take up to 6 months or more); however, they can still put a lien on your property.
“What is a lien anyway,” you may be asking. Allow me to explain. A tax lien is a legal claim on your property. But…this is not the same as a property seizure. With a lien, they are not actually taking your property…they are just basically calling dibs on it. This means that the lien ensures that government gets first right to your property over any other creditors. Although the government will probably never actually kick you out of your home, having a lien placed on it becomes a matter of public record. And the lien will make it incredibly difficult to sell your home or even to secure a line of credit. This is because the IRS (or state taxing authority) gets paid above all else. As if all of this wasn’t bad enough…a lien will hit your credit score like a jab to your nether regions. It. Will. Hurt. Having a low credit score will make it nearly impossible to get a car loan or rental agreement (just to name a few). For more information on tax liens check out our blog here.
Myth #6 – “I can totally submit an Offer without any professional help.”
Wrong. The average taxpayer does not know nearly enough about the IRS collection process to help themselves. This isn’t a reflection of how much or how little time they spend on their application either. Quite frankly, they can dedicate all the time they have to their Offer and still not know enough. This is for a variety of reasons. For example, they may end up overstating their assets and thus offering the IRS too much money. Also, they do not know the standards the IRS uses for basic living expenses and such. They also do not know what documents need to be provided for substantiation. These are just a few of the reasons that the average taxpayer may seem unfit to file their own offer; they do not have the expertise or know-how that a tax attorney spends years learning and mastering. That is why it’s extremely important to at least consult with a tax attorney before trying to submit your own offer. Not to mention how tedious and time consuming the process is. In fact, you may decide that you want to submit an offer on your own, do all the necessary work and have everything in order only to be rejected by the IRS because you don’t actually qualify for an Offer in Compromise. Tax attorneys know the ins and outs of who and who does not qualify. Therefore, it is in your best interest to contact an experienced attorney who knows everything about the process and can save you loads of time and energy.
Have a question? Contact Venar Ayar.