The IRS and the FTB don’t negotiate tax debt. Neither agency will write off a dime of tax debt because the taxpayer asks it to. Their missions are to collect taxes owed equally from taxpayer, and to inflict financial pain to do so because there can’t be favoritism in collecting taxes owed. You can’t get out of some of your taxes, just because you negotiate harder or longer than me; it’s not fair. And the law doesn’t allow it.
Indeed, audits proceed without regard to whether the taxpayer can actually pay the debt. The point of an audit isn’t to maximize tax revenue, but rather to ensure that every taxpayer is paying their fair share. The tax system functions, in large part, because (almost) everyone agrees that taxes are assessed and collected according to the law and with equal application to everyone. Read more here about how the primary mission of the IRS isn’t tax collection but law enforcement.
Offer in Compromise Mechanics
Once the audit is completed, and the IRS or FTB issues its tax assessment, then the file goes to the IRS Collections division (as opposed to the Assessment division, which is in charge of audits). It is only in Collections that the IRS will consider writing off tax debt, with an Offer in Compromise. It actually took an act of Congress – I.R.C. § 7122 – to give the IRS the authority to write off a tax debt. Under this code, the IRS will enter into a contract with the taxpayer whereby it writes off part of the tax debt, in return for cooperation in paying everything that the IRS could get through collection anyway plus future compliance with tax obligations.
The Offer in Compromise process looks a lot like bankruptcy, only the IRS is the “creditor”. The taxpayer provides an accounting of everything he owes, everything he owns, his income and expenses. The IRS computes the amount that it could collect from him (both by seizing and selling assets, and garnishing future earnings), and if it’s offered one dollar more than that sum, it should, in theory, take it. The process can be complicated. What kind of expenses does the IRS allow, and not allow, to a taxpayer? How does it compute future earnings for a self-employed person? What if you’ve sold a boat before making the offer?
Here’s the bottom line on Offers in Compromise: The Offer-in-Compromise (“OIC”) process is invasive, lengthy, and only rarely successful. There’s a popular perception that many people get large amounts of tax debt reduced by filing for one. They don’t. Very few Offers-in-Compromise are accepted by the IRS. The congressional committees that oversee the Treasury Department (the agency that houses the IRS) have mandated that the IRS collect the full amount of taxes owed from everyone who owes. After all, it’s only fair. That means that the few Offer-in-Compromises the IRS does accept are largely for very elderly people or people who have permanently lost the ability to earn an income.With everyone else, the IRS holds out for the possibility the taxpayer will be able to repay in the future. Just because a taxpayer is unemployed today, doesn’t mean they won’t work in the future and earn everything needed to repay the taxes owed.
Can You Submit An Offer in Compromise Yourself?
The short answer: yes, absolutely. In fact, here’s the form and the pre-qualifier tool. To qualify for an OIC, you must prove that you can’t pay the total tax owed before the collection statute expires (usually ten years), using the net equity in your assets plus any future income. You’ll find a lot more details on the qualifications and process here.
But, just because you can submit an Offer in Compromise on your own doesn’t mean you should. At least not without having a tax attorney look it over first. I don’t do many for clients because it’s usually a waste of the client’s time and money (the IRS accepts so few). I also dislike Offer in Compromise because it’s what so many predator-Tax Resolution Firms sell, even though they know almost no one who hires them will ever qualify for an Offer in Compromise. These sleaze-bags take a person’s money, fully knowing their client is likely to get nothing in return. I loathe these bottom-feeders and have ranted against them in the past. And the false promise of an Offer in Compromise they peddle.
Occasionally, however, the circumstances are right for an OIC. As with so many aspects of tax, it’s best if you speak to an experienced professional first. Let’s discuss the particulars of your tax issue, so that we can fully evaluate all the alternatives available to you with an eye toward your situation.
August 17, 2021