What’s Wrong with IRS Offer-in-Compromise
For most tax practitioners, OIC tax reductions have only been available for individuals, and not for businesses. About 2/3 of their Offers are rejected by IRS. Of those offers accepted, even more crumble because of failed payments.
Let’s start over. Large-dollar reductions of tax liability with the IRS Offer-in-Compromise (OIC) program can actually happen.
My results with Offer in Compromise are pretty dramatic. Of course, I only take on large cases.And recently, one of my business tax clients enjoyed a major success with an IRS Offer. The company had accumulated a large amount of tax debt, after having filed a few returns with unpaid liability. Through the offer process, the client received a 59.5% reduction of tax, penalty and interest. IRS agreed to write-off nearly $2.25 million dollars, and allowed the client to stay in business.
But the process was not simple. For high-stakes OIC’s, there are always complications. In this case, along with a large federal liability, there was a large amount of state tax due as well. The offer process had to balance the state tax collections with the IRS tax collections. You can imagine that both agencies always want to have first priority in payment. Both cannot be first. But that is another story to discuss.
First Rule of the Large Offer
IRS wants money. That’s easy. But what does the client want? A good IRS tax attorney knows that asking the question always matters. On the surface, the IRS seems to have all of the power. It has a wealth of tax law and tax procedure to find and collect. But there would be no “offer” to pay that tax, unless the client was trying to accomplish some goal. So we consider the client’s rights. And yes, even businesses have rights protected by law.
Frankly, I prefer to start with the client’s goal, not the tax law, and not the IRS procedure. Here, this client wanted to stay in business, and to pay only a limited amount. First rule: the OIC game plan is based primarily on the client’s goals and protected rights — and not the IRS’s rulebook.
Planning the Deal
There has to be sufficient planning for a significant corporate offer-in-compromise to succeed. There are numerous factors – one just cannot list them. However, factors like ownership structure, working capital reserves, other business liabilities, seasonal cycles, ownership ability, inventory, business asset age, conditions and value, are some of the obvious considerations.
Practitioners must also plan the time necessary avoid enforcement from IRS collection. Still, they must also allow any tax assessments to mature at the federal and state levels. This process is absolutely critical in large-dollar offer-in-compromise cases, and is where so many practitioners making large-dollar Offers fail to provide complete benefit to the client.
How to Calculate the Offer
Let’s look solely at the offer based on a company’s ability to pay. Many people, and even some tax practitioners believe that you can just “offer” IRS some amount, some “pennies-on-the dollar” number or percentage, and that the Department of Treasury will respond. But it does not work that way.
Even the IRS publications only provide part of the story. Instructions to IRS Form 656 will tell you that you simply have to calculate the Reasonable Collection Potential (RCP). Then, on Form 656, it seems that your only best offer will be the Reasonable Collection Potential amount, as outlined on that form. But not always.
Negotiate the Deal
Once the OIC is under consideration, IRS’s Offer Specialist has the power to reject an Offer, or even make a counteroffer. Counteroffers are a fair part of the process – since they are based upon the Offer Specialist’s first read of the Offer. The Specialist’s job, then, is to begin with the Offer, and find opportunities to negotiate for an increased amount.
But there is so much more to achieving the best available result for the client. Believe me, this process is indeed a negotiation. As they say, you always negotiate from your points of strength. To negotiate the client’s best offer, you must be able to strongly communicate the client’s strengths:
- IRS must measure its legality risks. Ultimately, the government must weigh its likelihood of prevailing in a court of law. Note that several courts may take venue in a challenge against IRS. Part of this company’s OIC proposal included a full brief of IRS’s legal obstacles to collecting more from the company than offered.
- As well, other events can become a factual hindrance to IRS’s collection. Real-life facts (ie: availability of business owner, dissipated assets, etc.) can actually limit IRS’s ability to collect amounts exceeding the original Offer. The proposal for this company provided IRS a fully researched analysis of its practical risks.
- The Internal Revenue Service does not want to assets of the company. It seeks cash. But cash can be elusive. Sometimes IRS personnel must be reminded.
Make certain that your IRS tax attorney has a comprehensive view of the business, the owners’ plans, and all the steps required to reach those goals with OIC. Under IRS’s Offer-in-Compromise program, good results are achievable. I have knowledge, experience, and skills from working both for the IRS, and defending clients against them. My Naperville office serves Downers Grove, Wheaton, and the rest of the Chicago metro area. Contact Tax Law Offices today!