Why It Can Be Hard to Get an Offer in Compromise
Getting an OIC approved can feel like trying to win a radio call-in contest. The IRS doesn't just hand them out freely; they need to be convinced that it's their best option! And that's where the tricky part comes in—the IRS's approach is that an OIC has to work in their favor just as much as it does for you.
Why the IRS Plays Hardball
The IRS only accepts an Offer in Compromise if it represents the most they can collect from you.
It's not about giving you a break out of goodwill but maximizing their recovery. Here's why they play hardball:
- They Want Their Cut: The IRS aims to collect as much as possible. Suppose they can recover more through monthly payments, asset liquidation, or other collection methods. In that case, they'll reject your offer without hesitation.
- Strict Guidelines: The IRS uses a stringent formula to determine what they think you can pay. If your offer doesn't meet their minimum acceptable amount, it's a no-go. They'll use this formula to scrutinize your income, expenses, assets, and future earning potential.
- The Financial Litmus Test: Your finances are put under a microscope. If they see any sign that you could pay more—even over time—they will likely say, "Try again!" The IRS's stance is clear: they need to be convinced that accepting your offer is the best way to get their cut, and they won't budge unless the math is in their favor.
Getting Real About What the IRS Wants
Before jumping into an Offer in Compromise, it's crucial to understand that it's not about throwing a random number at the IRS and hoping they accept it. You can't just pull a figure out of thin air and say, "This is what I'm willing to pay." The IRS is more like an accountant with a magnifying glass—they will dissect every financial detail of your life to see what they can collect. So, it's not just about how much you want to give them; it's about what you can provide them according to their strict standards.
An offer isn't based solely on what you think you can pay monthly. It's also about every asset you own and the equity in those assets. That includes your house, car, retirement accounts, and even that boat you haven't used since last summer. And let's not forget real estate—all real estate. This includes your primary residence and vacation homes, rental properties, and even vacant land collecting weeds. Yes, they want to know about everything you own. And here's the kicker: even if you can't physically access the equity in something you own, the IRS still considers it when evaluating your offer.
A Closer Look: Why the IRS Might Not Settle
Let's look at it another way.
- Suppose you own a house with $500,000 in equity but have zero cash assets or money in the bank.
- Your tax bill is $125,000.
- Why would the IRS negotiate with you to pay less than your total tax bill because you don't have liquid cash?
- In their eyes, you theoretically have $500,000—it's just not in the form of money.
- The IRS will consider that equity when determining your ability to pay.
This is a prime example of why an Offer in Compromise might not work. Suppose the IRS sees that you have significant assets. In that case, they're unlikely to accept a reduced offer even if they're not liquid. They know you have the means to pay your tax debt in full, even if it means taking drastic measures like refinancing or selling property. The IRS's goal is to maximize what they can collect, and they won't accept less just because your assets aren't in a checking account.
The IRS Has Time on Its Side
Another caveat: the IRS considers how long they have left to collect the debt from you.
The statute of limitations for collecting taxes is typically ten years from the date the tax was assessed.
If they see that you could make monthly payments over the remaining time and pay more than you offer, they'll have no reason to settle for less.