Sometimes a taxpayer can wipe their tax slate clean at a massive discount. If a taxpayer qualifies to make an Offer in Compromise (“OIC”), the IRS may accept less than the full amount a taxpayer owes. Taxpayers have no legal right to have a tax bill reduced by the IRS, however, the IRS must give a properly submitted OIC fair consideration. Recently, the IRS has accepted approximately 40% of submitted OIC’s. In the 2000’s, the IRS routinely accepted only 25% to 30% of submitted OIC’s.
Sounds simple enough, right? Not so fast. Submitting an OIC can be a burdensome, time-consuming matter; but likely far less burdensome than paying the full amount owed to the IRS. Calculations on the IRS Form 656 determine the amount that a taxpayer’s offer should be. But what happens when the taxpayer doesn’t have that much to offer (or anything close to it)? Luckily, Section 3 of Form 656 provides the taxpayer the opportunity to draft an Explanation of Circumstances.
The Explanation of Circumstances is the taxpayer’s chance to make a sales pitch to the IRS. Here, the IRS is particularly looking for detail regarding unplanned events, special circumstances, or anything else that may impair the taxpayer’s ability to provide for themselves and their families. Supporting documentation is a must for the IRS to consider an offer lower than the calculated offer amount.
The real question then becomes: How do you get the IRS to accept an offer for less than the calculated amount? The answer is somewhat simple: you need to tell a compelling narrative to persuade the IRS to accept your offer. Practically, this can be a little more difficult. Remember, this is not a pity party. Bad things happen to good people, and good people make bad decisions. The IRS is concerned with the financial impact the tax liabilities have on the taxpayer and the taxpayer’s family; not with how bad the taxpayer’s luck has been. But what the IRS really needs to hear is why accepting the offer is good for them.
Whether you are selling assets, borrowing from family, or taking out a loan, make it known to the IRS why your offer is good for them. The time value of money is always a great talking point in your Explanation of Circumstances when discussing the positives of your offer to the IRS. A large lump sum is often a far better and safer option for the IRS than attempting to collect from a taxpayer for years (or even decades). For example, an older taxpayer would be wise to mention their age versus their life expectancy in an Explanation of Circumstances. If a 65-year-old male owes the IRS $100,000.00 and offers $30,000.00, he must discuss why the IRS will never be able to collect more than the $30,000.00 offer. If he can only afford to pay $200.00 per month for the foreseeable future, and his life expectancy is 77, he will only pay the IRS $28,800.00 over the next twelve years. Thus, not only would the IRS receive more by accepting the taxpayer’s offer, they would also be able to invest the amount for twelve years almost surely allowing them to recoup the full amount originally owed (or more).
When making an OIC, bank account statements are not enough to persuade the IRS to accept your offer. Taxpayers need to be persuasive and tell a compelling story to nudge the IRS in the right direction. For assistance in preparing an OIC with a compelling Explanation of Circumstances, contact an experienced tax attorney.