On July 23rd the Wall Street Journal online edition published an article about a settlement between a well known nationwide tax problem resolution firm and 18 states in reference to misleading advertisements. The article pays particular attention to what the IRS refers to as unrealistic results promised by tax resolution firms with the “Offer In Compromise” as an alternative to other forms of collection. As well, peppered throughout the article, are stories of dissatisfied taxpayers who payed “thousands” of dollars to the tax resolution firm but didn’t receive the results they expected. The article doesn’t go so far as to negate the OIC as a solution to a taxpayer’s problem, but it certainly places it squarely in the “not likely to happen” category. It is unfortunate that the WSJ chose to paint this picture as there are glaring omissions regarding the OIC that make it a very realistic solution to many taxpayers. Additionally, there are several settlement options for a taxpayer outside the OIC, but the article only mentions installment agreements.
Typically, the IRS is quoted as blaming “frivolous” Offer Filings by tax professionals in efforts to “stall” collection activity as it’s primary reasoning for the rejection of more and more Offers. It shouldn’t surprise you that this position is a “red herring.” Although the filing of an OIC suspends the ability of the IRS to levy a taxpayer’s wages and bank accounts while the OIC is pending, it also “tolls” the collection statute. The IRS generally has 10 years from the date of assessment to collect taxes owed by a taxpayer. However, this period is “tolled” (stopped from running) and thereby extended when an OIC is pending. The IRS doesn’t lose any of its legally permitted time to collect an outstanding tax liability when an OIC is filed. In fact one could argue that the IRS gains an exact “roadmap” to the location of a taxpayer’s assets when an OIC is filed. This is largely because in order for an OIC to be considered “processable” the taxpayer must submit a financial statement (Form 433 A and/or B) along with three months of supporting documentation, including bank account numbers.
When the OIC is rejected this “roadmap” gives the IRS a jump on filing a levy or seizing a taxpayer’s assets. This reasoning exposes the flip-side of the debate, which is that the IRS routinely rejects Offers in Compromise, in order to gain the upper hand in more aggressive collection activity. This viewpoint is supported by the large number of properly filed offers that are initially rejected but later accepted on appeal. It’s no wonder that there is a growing perception that the IRS breeds a “culture of frustration” designed to get taxpayers to give up and pay rather than pursue a collection alternative they might otherwise qualify for.
It is certainly true that an Offer In Compromise is not the solution for every tax problem, maybe not even most. However, a closer look at the facts involving the OIC would draw the critical thinker to a much different conclusion than the position taken by the WSJ. First, most taxpayers give up and pay out of frustration when they would otherwise prevail with a little persistence. Second, some taxpayers that file an OIC really possess the ability to pay their tax liability and don’t meet the OIC qualification standards. Their “dissatisfaction” with results is a matter of personal greed in an effort to avoid paying tax they legitimately owe. Lastly, the OIC is most assuredly still a viable solution in many cases to settle a tax problem. A taxpayer should seek competent, professional assistance when considering an OIC. A competent professional will analyze the taxpayer’s situation before recommending any solution. If an OIC is appropriate the competent professional will inform the taxpayer that it is likely to be rejected initially and an appeal will be necessary, and therefore patience is essential.