In a recent blog post, I discussed the reasons why many people should not file an Offer in Compromise. I believe it is part of my job and my commitment to my community to dispel myths advertisers spread. Especially the myth that OICs are a cure-all for back tax problems.
You only have to Google “Offer in Compromise Maine” to see just how much out-of-state money slick advertising agents spend. All in the pursuit of trying to find someone desperate enough to pay them. The money is so good for some firms that they set up fake street locations in major cities.
Fake locations often include a set of made-up reviews and ratings. If you look closely at the firms offering similar services in Bangor or anywhere in Maine, you quickly see this pattern. If you take the time to drive by, you often notice the building is empty or the firm has a different name.
This includes many advertisers who pretend to be tax attorneys, CPAs, or Enrolled Agents. They advertise like they are attorneys quite convincingly until you read the fine print. If someone only wants to talk on the phone, chances are they aren’t really a tax attorney. They are just selling you as a lead to someone from away.
Ensure You Qualify Before Filing
I can think of one recent example where another tax professional told me that a new client paid $15K for an Offer in Compromise on $100K in back tax debt. The only problem was that the client had $105K in the bank. After being submitted, the IRS promptly came back and said they’d be happy to accept $90K.
Had this client engaged with a reputable firm, they would have either advised them that an OIC wasn’t a good fit. They would have figured out how to legally exclude the money first before filing. As my example illustrates, much of that ad spend and misdirection lines peoples’ pockets.
While an Offer in Compromise is an excellent tool it is not a cure-all. Despite all this, OICS do have their place. This is what we will discuss today.
When to File
While there are “exceptional circumstance” Offers in Compromise, they are rarely accepted. That means that most clients look at a Doubt as to Collectability Offer in Compromise. Offers in Compromise are based on assets and income. Offers in Compromise are usually useful to people in similar financial situations to those who qualify for bankruptcy. If you owe a lot more than you make, the IRS is likely interested in your offer.
Financial Information the OIC Process Considers
The OIC process looks at assets, liabilities, future cash flow, and wages. Then, it calculates what the IRS thinks you can pay. These formulas figure how much you can reasonably pay over the coming years.
If a client’s number is:
- Negative, the IRS likely accepts a very low offer amount.
- Positive but still less than the amount the client owes, the IRS likely accepts a reduced amount.
- Positive and more than the amount owed. The IRS rarely accepts a reduced amount.
An offer in compromise helps most when a person’s financial situation experiences a downturn. OICs can also be useful when the back taxes come from a large asset sale and the money is now gone.
OICs are also useful when someone is in a certain range of income. This is a function of the fact that the exclusion amounts everyone receives typically exclude all their income.
Considerations for Maine Residents
We found that families in Maine with expenses in line with the average usually qualify easily when we lead them through the process. On occasion, our firm must do a bit of planning to get the offer accepted due to a small issue. However, such issues are usually quite manageable for the average Maine resident.
In our experience, if a family makes between $0-70,000* the success rates are great. Above those income levels planning or larger debt is usually required for the IRS to take a reduced amount. This is not to say that higher-income clients are always denied or can’t successfully file. It simply means that more planning and structuring is usually needed.
*After any business expenses.
OIC Process Problems
An Offer in Compromise gets tricky when:
- A client can’t liquidate certain assets.
- A business needs significant assets to operate.
- Clients need large assets to pay for normal expenses over time.
The IRS defaults to seeing such assets as available for liquidation. Unless you can prove that they shouldn’t be. If you have this kind of issue, we highly suggest professional help.
Fixing a rejection based on these factors is much harder, time-consuming, and expensive than filing correctly the first time. In addition, the IRS likely compares the two OICs. They ask more detailed questions about your financial situation.
Planning to Mitigate Problems
In addition, while individuals can’t and shouldn’t hide assets from the IRS, they can engage in pre-planning. There are several planning and timing techniques that can increase an offer’s chances of success. Planning often involves spending down.
You can convert assets prior to submitting an offer. While planning often requires a substantial amount of knowledge and time, it is often well worth the cost. Paying extra upfront to save tens, even hundreds of thousands is a wise investment.
Serving Central & Northern Maine
If you struggle with a tax issue at the Internal Revenue Service or Maine Revenue Service and you live in central or northern Maine, give us a call for a zero-risk initial consultation. Located in Bangor.
We work with clients from southern Maine, through Augusta, all the way up to Fort Kent. If you are outside our home state and want a second opinion, consider calling us. Regularly, we work with out-of-state referrals.
We Work Locally & Nationally!
We are admitted to practice before all levels of the Internal Revenue Service in all 50 states. In addition, by virtue of that admittance, we can practice before all levels of the Maine Revenue Service, the Maine Board of Tax Appeals, and 48 other state taxing authorities.