IF YOU cannot pay all your taxes owed to the IRS, you may make an offer to pay a smaller sum to fully pay all taxes, penalties, and interests. This is called Offer in Compromise (OIC). Let’s discuss the pros and cons of OIC.
Advantages: If the offer is accepted, you will be left alone; tax liens will be removed and enforced collection avoided. The IRS, through a policy statement, declared that they will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and that the amount offered “reasonably reflects collection potential.” The goal is to achieve collection of what is potentially collectable at the earliest possible time and at the least cost to the government. The ultimate goal is to arrive at the compromise that is in the best interests of both the taxpayer and the IRS. Acceptance of an adequate offer relieves you of a financial burden and gives you a fresh start toward compliance with your future filing and payment requirements.
Disadvantages:
1. You must list all your assets. In the process, you are giving them a roadmap to seize and sell your assets if the offer is not accepted and nothing else works.
2. Offers have been tough to get approved. However, IRS demonstrated some humanitarian aid for 2012:
• Acceptance rate increased from 16percent to 39 percent.
• Rejections decreased from 21percent to 17percent
3. The statute of limitations for the assessment and collection is suspended during the period plus another year thereafter.
4. One missed payment results in a default that gives the IRS the right to resume collection.
5. You must comply with all provisions relating to the timely filing of returns and payment of taxes due for the next five years.
Of course, if things do not work out, you can always consider the alternatives of installment agreements and bankruptcy. In the meantime, there is a hold in the collection process that in itself is an accomplishment as you straighten out your financial affairs. I suggest that you use an enrolled agent, CPA, or tax lawyer to prepare it for you. If you cannot afford their fees, prepare it yourself and just pay a professional to review your offer before submitting it to the IRS.
TIP: If you file for bankruptcy, timing is critical. The IRS cannot and will not entertain your OIC after you file bankruptcy.
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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.