IRS’s Offer in Compromise is Worth the Trouble
One of my business tax clients enjoyed a major success with an IRS Offer. But the process was not simple. There were 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.
Background Facts:
A corporate client avoided IRS for many years. However, fears of potential punishment from IRS swayed the owners to take action. The company had multiple years of unfiled returns, some of those years being very profitable.
After filing the necessary returns, IRS assessed additional $3,750,000 in tax, penalty and interest. Through the offer process, the client received a major reduction of penalty and interest. IRS agreed to write-off nearly $2.25 million dollars, and still allowed the client to stay in business.
Actions Taken:
We always begin outlining the client’s ideal outcome, after a successful OIC. The next steps, then, were to estimate the potential liability, and file the necessary tax returns. We arranged payment of tax to allow the time necessary avoid enforcement from IRS collection, and for the assessments to mature at the federal and state levels. This process is absolutely critical in large-dollar offer-in-compromise cases. This is where so many practitioners fail to provide the best result to the client.
Negotiate the Deal
We submitted our initial Offer-in-Compromise, along with an 800-page document, which legally briefed and supported our positions in the Offer. Detail, thorough detail matters.
In this case, we expected IRS to make a counteroffer, due to one key factor: the Sale Value of the Business. If the business were sold in the open market, the value (as estimated by IRS) would be greater than the value of the original Offer. Obviously, if IRS could simply sell the business for more than the OIC amount tendered, it would demand the greater amount for payment of tax liability.
As expected, the government wanted a substantially increased counter-offer. The Offer Specialist focused on the business’s valuation. During that negotiation, IRS showed me that the company’s fair market value was indeed reasonably calculated. However, I then showed why this business was better left intact and operating in its current state, instead of sold. The fair market value-based figure, therefore, could not justify IRS’s proposed increase.
Results:
We settled upon a slight 10% increase in the original Offer. I successfully negotiated that the company would continue to operate. I also convinced the IRS that my client must keep a 60-day working capital reserve, so that the business had a fighting chance to survive. The business also was not forced to liquidate itself. Although the business owner wanted to aggressively pay the offer, we negotiated a gradual payoff, which also allowed the business to sustain operating cash flow during the offer process.
Accepted by IRS, the final amount of the offer in compromise was just over $1,500,000 ($1.5 million). After successful payment of the OIC, the IRS then issued a Release of Federal Tax Lien. The tax debt released was slightly under $2,250,000 ($2.25 million). This process resulted in a reduction of IRS debt by 59.5%.
The entire process took well over a year, but produced a good result, and a happy business client. There really are dramatic results available with IRS Office-in-Compromise.