Why Most IRS Offers in Compromise Fail (Debunking Myths Part 1)

Let’s debunk a few myths about the IRS Offer in Compromise. Some of these might surprise you.

By now, you’ve heard the promises made on TV, radio, and social media ads. 

• “We can settle your tax debt for pennies on the dollar.”
• “Wait until your income drops.”
• “You only have to offer 10% of the debt.”
• “IRS should be happy to get something from me.”

Those ideas sound good, but they are often the reason an IRS settlement offer gets rejected for those who otherwise qualify for an Offer in Compromise.

This is especially true for business owners, retirees, and people nearing retirement who have pensions, investment accounts, or significant home equity. These are the cases where the Internal Revenue Service often looks harder at the taxpayer’s ability to pay. At the same time, these are the cases where people misunderstand what the IRS really looks for.

If you are considering filing an IRS Offer in Compromise, you should first understand how the IRS reviews these cases.

IRS OIC Fail Myths Part 1, IRS Tax Attorney (Naperville, IL)

Myth #1: “I Can Settle My IRS Tax Debt for a Percentage”

Can you settle with the IRS for 10 percent? You would think so, listening to radio ads. Many people believe there is some magic number, like 10 percent or 20 percent of the tax debt, that the IRS will accept to settle their taxes.

That is not how an Offer in Compromise works. The IRS does not use a set percentage to settle tax debt. 

Don’t get me wrong. A settlement for less than 100% of the debt is ALWAYS some percentage reduction. But there is no standard percentage amount.

Reality: The IRS will instead look at multiple factors:

• Your net assets
• Your net income
• The time left for the IRS to collect
• Legal roadblocks to your ability to pay
• Your filing and “compliance” history

For retirees or near-retired taxpayers, the IRS may review pensions, retirement income, brokerage accounts, and home equity. But the IRS will review their overall ability to pay, including their unique, special circumstances that could affect payment.

For businesses or business owners, this could include business cash flow, accounts receivable, equipment, and real estate.

That is why two taxpayers with the same amount of IRS tax debt may receive very different results. Every taxpayer’s story is different.

Related Video: The Smart Way to Pay Through Your 401(k)

Bottom Line: The “pennies on the dollar” idea is misleading advertising, but it is not reality. Some percent reduction will occur. But that is based on your overall circumstances.

Myth #2: “The Settlement Will Be What I Want to Pay”

Many taxpayers think an IRS settlement is based on stating a person’s desired amount. Or that they can just pay the tax, but no interest or penalties, because you have “a good reason”.

These OIC tax reduction settlements are not determined that way. Here is where most people go wrong, because they never realize the red flags that the IRS considers. They never look at what red flags the IRS cares about.

The IRS is not deciding whether your offer sounds fair or reasonable. The IRS is deciding whether it believes it can collect more money from you over time.

Those make up the IRS’s main concerns in most IRS Offer in Compromise cases.

• Can the IRS collect the full amount of liability?
• Can you afford to pay more than what you offered?

If the IRS believes you can borrow against assets, tap into equity, make monthly payments, or use future income to pay the debt, the Offer may be rejected. That is, if you even qualify for OIC.

Also, the interest and penalties do not matter in this calculation.

This is where many business owners and retired taxpayers run into trouble. They fail to successfully argue why their situation should get special treatment, especially when the IRS still sees valuable assets that could be used to pay the tax liability.

Bottom Line: An Offer in Compromise is not based on what you hope to pay. Instead, it should be based on 1) how the IRS reviews your overall ability to pay, and 2) what is the lowest amount we can convince the IRS to accept.

Myth #3: “I Have to Close My Business Before Filing an Offer”

Business owners are being told by “tax resolution experts” that they must shut down their business before the IRS will consider a settlement.

That is not true. A business can remain open and still receive a huge tax reduction through the IRS Offer in Compromise program.

We see these cases all the time! In fact, there are many OIC settlement cases where keeping the business open makes more sense. A working business may help support a payment plan or help fund an agreeable settlement.

But the struggle is real. When a failing business has little expected future income, sometimes closing the business may reduce 

• What the IRS expects to collect.
• What the IRS can legally collect.

But business owners should be careful here. The IRS will see multiple Red Flags about any closing business making an offer.

For example, the IRS can penalize the owner of a company that closes, but then opens a similar company to replace the closed business.

Helpful Resource: This Red Flag Finder will open your eyes to what the IRS looks for.

Closing a business does not automatically remove the business owner’s tax debt personally. Payroll tax debt, including Trust Fund Recovery Penalty assessments, may still follow the owner personally. 

Related Video: 

Bottom Line: Every situation is different. The decision to close a business should be legal and financial, not a guess.

Final Thoughts

Most failed IRS Offers in Compromise are built on bad assumptions about how the process works. An IRS Offer in Compromise is not only about what sounds fair. It is first about what the IRS believes it can collect.

There is another reason why IRS Offers fail. It is the knowledge that goes into negotiating the settlement. If your offer is based on myths, bad advertisements, or even bad advice.

• Chat GPT or YouTube videos cannot guide you through making your best settlement. 
• The “do-it-yourself” approach will cost you much more, both now and later.
• Unlicensed “tax help” will not have the experience to help you.

For the person who is serious about a tax-reducing Offer-in-Compromise, the best result is to speak with a tax attorney who is an OIC specialist to make your lowest settlement with the IRS.

FAQ Section

What percentage does the IRS usually accept in an Offer in Compromise?

The IRS does not use a standard percentage to settle tax debt. Instead, the IRS reviews your assets, income, future ability to pay, and the time left to collect the debt. The offer is not even presented in terms of percentage.

Why do most IRS Offers in Compromise get rejected?

One of the main reasons many settlement offers fail is that the IRS believes the taxpayer can pay more. But also, the Taxpayer fails to correctly address his ability or inability to pay through assets, future income, equity in the home, or other assets, or monthly payments. Incomplete filings, inexperienced representatives, and poor planning also cause many rejections.

Can I keep my business open and still file an Offer in Compromise?

Yes. Many business owners keep operating while negotiating an IRS settlement. In some cases, staying open may actually help support a settlement strategy. In other cases, business closure may be helpful, or even required by the IRS.

Does home equity affect an IRS Offer in Compromise?

Yes. The IRS usually reviews available home equity when evaluating your ability to pay. This is especially important for retired or near-retired taxpayers, because that home equity might be the taxpayer’s largest or only asset.

Will the IRS look at my pension or retirement income?

Usually, yes. The IRS may review pensions, retirement distributions, brokerage accounts, and other sources of future income when evaluating an Offer in Compromise. A tax attorney can develop a taxpayer’s special circumstances that convince the IRS to exempt the savings.

Can I file an Offer in Compromise myself?

Sure, you can. However, many rejected Offers involve mistakes in financial disclosures, calculations, timing, or strategy. Other mistakes include incomplete information, hidden income or assets, and undervalued income. Further errors include mistakes about the IRS’s reach, which could otherwise cause someone to offer 5 or 6 figures more than necessary. 

Does the IRS have to accept my Offer if I cannot pay the full amount?

No. The IRS only accepts an Offer if it believes the settlement is the most it can reasonably expect to collect. However, there are still other conditions that must be fulfilled and followed up on.

What does the IRS really look for in an Offer in Compromise?

Once you qualify, the IRS mainly looks at your overall ability to pay. That includes assets, income, business cash flow, equity, future earnings, and collection risk. Every case is different, but the IRS’s analysis is fairly constant.

Is an Offer in Compromise better than a payment plan?

The Offer-in-Compromise is not always better. Some taxpayers are better suited for installment agreements or other collection options. The right solution depends on the taxpayer’s finances, special circumstances, and long-term goals. Usually, a tax attorney who specializes in IRS Offer in Compromise cases can give you full options, including the pros and cons of each.