What are the Cons of an Offer-in-Compromise?
Nothing comes in life for free. Offers are no different. I can list off about a dozen things which could make an offer a bad idea. I will talk about the top three things as this is what gets people 90% of the time. I will also be doing a podcast, to be posted later, where I go into more reasons why an offer is a bad idea if you want to learn more about this.
You Must Be Current with Taxes
The big one is that you must be current. Meaning that you file your taxes on time and pay all taxes due before the due date of the return. You need to do this both during the processing of the offer and, if the offer is accepted, for five years afterwards. No filing late, no owing another balance. Fail to do this and the whole unpaid balance (plus any accrued interest and penalties) comes back.
If you are self-employed, the issue is even worse. You will be required to make your estimated tax payments. Miss a payment during the offer process and your offer will be rejected. Period. I can tell you from personal experience that the IRS pushes the issue of making estimated tax payments hard.
So, in summary, the first big con of doing an offer is the need to keep current with taxes now and for five years thereafter. Fail to do so will mean you are back to square one.
The Need for Financial Disclosures
Making an offer to the IRS is the financial equivalent of a strip search. You have to expose everything to the IRS: bank accounts, employment information, real estate, retirement plans, you name it. You have to list all of your assets and sources of income. If the IRS rejects your offer, as it is wont to do, it now has a perfect roadmap to collect your back taxes. If you are employed, it can contact your employer for a wage garnishment. Have money in the bank. Now the IRS can seize (called a levy) those funds. The risk of a seizure is not large (it hasn’t happened to any clients) but it is still a risk.
A bigger risk is that if you fail to be completely honest. If you have things in your past that you don’t want the IRS to know about (e.g. you transferred the house 100% to the wife or you have a Swiss bank account) then it might not be a good idea to file an offer. If you don’t think the IRS can find this stuff out, you are wrong. Very, very wrong. I have had several cases where the IRS picked up on stuff that my client had forgot to tell me about. I just heard today that the IRS is reviewing some accepted offers after finding that taxpayers with foreign accounts filed offers but “forgot” to list that account in the Caymans.
Offers are a chance for the honest but unfortunate taxpayer to get a fresh start. Just be aware that you are laying out your whole financial life. The IRS could use that information if you don’t work out a deal or, worse, the IRS may prosecute you if you are not honest. Full and complete disclosure is required.
You May Not Get Full Credit for Expenses
Last, but not least, the IRS does not always allow taxpayers to claim full credit for their actual expenses. As part of calculating an offer, the IRS looks at your excess income over your household expenses. The excess is then used to compute the income portion of your offer (excess income times 12 or 24 months, depending on the method of paying the offer). The problem is allowable expenses.
Allowable expenses are the amounts that the IRS “caps” on things like food, clothing and miscellaneous; housing and utilities; car and truck ownership and operating costs; and, out-of-pocket medical. Let’s look at housing and utilities, for example. The IRS has a local standard amount for housing and utilities by county. In Maine, if you live in Portland (Maine’s big city!) then your cost of living tends to be much higher than, say, Westbrook (both in the same county). If you pay more than the standard amount then you are capped at the standard. In my experience, Portland living expenses tend to be well over the capped amount. By virtue of living in Portland, you will not get full credit for what you actually pay unlike if you lived in Westbrook where you may get close to 100% of what you actually pay.
The effect of these allowable expenses is to make many offers unaffordable. Don’t expect any sympathy from the IRS, an offer is just request for a settlement not an actual payment plan. We often find that when discussing payment plans the IRS is much more flexible regarding allowable expenses. Not so when making an offer. The IRS will hold very firm on this unless you have a really sympathetic case.
I hope you found this information useful and as I said above, I will be posting a podcast later this week. In that episode, I will go down a laundry list of the downsides of filing an offer-in-compromise.
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your IRS tax problems, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.
James D. Wade, Esq.
Law Office of James D. Wade
57 Portland Road, Unit 3
Kennebunk, ME 04043