You have undoubtedly heard TV advertisements promising to "compromise" "settle" or "negotiate" your IRS debt & you are given the impression that the result is guaranteed to be in your favor. If you will notice, these ads rarely come from Attorneys because Attorneys have a duty of honesty and advocacy for your interests. Many of these promoters have fought criminal charges & declared bankruptcy because of fraudulent practices.
You won't learn this from the TV ads but the procedure proposed to be used against the IRS is called an "Offer in Compromise". This procedure has been vastly over-abused as a supposed method of reducing or eliminating your tax debt. Mainly because these promoters are not Attorneys and cannot pursue your rights fully with the IRS and the Courts. They only have one method of resolving your problem but Attorneys have many solutions.
But, in fact, the IRS is also pushing debtors to submit offers in compromise. See What If & Letter 278C. So, why are fraudulent promoters and our enemy, the IRS, asking you to submit an Offer? The reasons may range from absolute ignorance to sinister opportunism against unsuspecting debtors in their most fragile time of life.
Before you are induced to make an Offer to Compromise consider these facts:
Rejection Rates: Although it varies from year to year, the average acceptance rate for an Offer in Compromise hovers around 30-35%, meaning the chance of rejection is 65-70%.
Cost: The IRS inquiry and process is very time-consuming (if done correctly) and requires a lot of financial planning and shifting. Thus, the fees to hire a representative are easily above $5,000.00 in most cases. Plus, the IRS requires you to put down (non-refundable) 20% of a lump-sum offer or begin making (non-refundable) payments for a 6-24 month Offer.
Unfairness in the Process: The amount of information you are required to reveal to the IRS about your personal life and finances is vast. The IRS literature suggests that when using their calculator, that your offer will be accepted. In fact, the IRS will review the Form 433 you are required to submit along with all the immense supporting documentation and deny you legitimate expenses while trying to raise your current income and the following 5 years of income.
The IRS will not allow expenses beyond the "National Standards" for the various items: Food, clothing, housing, auto, insurance, etc. So, therefore, your income is artificially inflated and your expenses are unfairly decreased. So, it appears you can pay substantially more than your submitted amount and your Offer will be denied.
Extension of Statute of Limitations for Collection: When you submit an Offer to the IRS, regardless of whether they accept it or not, you give them additional time to collect from you. So, the obvious trick is to solicit an Offer from you, gather all your financial information, plus the down-payment and then reject your offer to gain time onto the limitations period and know your financial ability to pay. Promoters of making Offers simply want to take your money.
Appeals: It is almost certain that your initial Offer will be denied and you will have to Appeal. But, this adds to the cost and continues to extend the Statute of Limitations.
It is easy to see that the only acceptable Offers come from people who happen to have a little money or equity in an asset and will not work again for the next 5 years. So, basically Offers are only good for retired, disabled or homeless people, not for everyone. Whatever you do, don't take money out of your retirement plan or sell an asset to pay for the taxes without getting legal advice. There's no sense in creating a new tax debt to satisfy the old one.
So, what the solution? First, see if amendments or filings may reduce the tax. Often times, with a proper filing you may owe little or no taxes at all. So, why would you make an Offer in Compromise when you owe no taxes?
Second, review whether a Penalty Abatement Request will reduce the penalties (without extending the statute).
Third, look at transforming the non-deductible tax debt into a deductible debt, such as mortgage.
Fifth, seek advice whether Bankruptcy might be a better solution. Much of the IRS collection process mirrors Chapter 13 bankruptcy so it might be best to file.
There are numerous other strategies and tactics against the IRS, depending on the process and your situation. It is best to review ALL your options with a tax attorney who represents your best interests.