Fix The Tax Code Friday: Offers in Compromise

2007 November 2
by Kelly

My recent post about an Offer in Compromise (where a taxpayer pays less than their existing liability as part of a deal) gone bad is in stark contrast to a rosier picture painted by CBS News. CBS seems to imply that offers are a bad idea because they reward those with outstanding tax liabilities by giving them a “break” that may not be deserved. Advocates argue that it is administratively more efficient to offer compromises because it’s better for the IRS to accept a dollar today than to take its chances on accepting a dollar tomorrow.

What do you think? Today’s Fix the Tax Code Friday question is:

Are Offers in Compromise good tax policy? Or are they unfair to taxpayers who regularly pay their obligations?

from → collections, fix the tax code friday, tax policy

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2007 November 2
Robert D Flach

KPE

As Martha might say, the IRS Offer in Compromise program is a good thing. Many so-called delinquent taxpayers are faced with high balances due to “Sam” resulting from the constant accumulation of penalties and interest, such that the P+I actually exceeds the actual tax due. Often this amount has grown to an amount that the taxpayer will never be able to pay off. It is certainly “more better” for the IRS to compromise with the taxpayer and actually collect some money than to have to eventually write it off.

I also strongly believe that the federal government should take a cue from the states and institute an amnesty program – allowing taxpayers with outstanding balances to pay just the actual taxes due and get the accumulated P+I abated. This has been highly successful on the state level in bringing in a large amount of cash in a short period of time.

One word of caution to those considering an Offer in Compromise – do not believe the frequent advertising claims that a particular firm can get you off the hook with “Sam” for “pennies on the dollar”. It just ain’t so. You will need to make a substantial and reasonable offer. Do not patronize firms that issue these ridiculous claims. Consult a reputable tax professional. Also be aware that you will need to pay the tax professional a fee for this service, usually up front.

TWTP

2007 November 2
Kelly

Excellent point, Robert, about the reasonableness of a compromise.

A potential client who had a 6-figure liability came into my office with a half-completed OIC. He told me that his accountant had recommended that he offer $2000. I told him that wouldn’t fly. He handed me an advertisement claiming something similar to what you mentioned (though a different firm out of GA) and said that his accountant said this firm could cut him that deal. I told him if that was so, he was wasting his time with me because I couldn’t. He ended up coming back to my office and working out an installment agreement.

2007 November 2
Another Tax Geek

OICs are an insult to the rest of us who pay our taxes in full. Harsh perhaps, but otherwise its just another form of income redistribution, from the responsible to the irresponsible. I can see abating interest and penalty, but the principal amounts should be collected in full.

2007 November 2
Kelly

ATG -

These days, most OICs are the equivalent of dropping interest and penalty. I recently had a client who had a mid 4-figure tax bill resulting from a high 3-figure obligation that she incurred years ago while married. She was hit with several penalties and interest over a number of years which made the bill unmanageable. The IRS does not have a system in place to consistently request abatement of penalties and interest other than an OIC, really.

2008 March 8
Frank

I wonder when the powers that be will wake up and realize that all the stimulus packages and interest rate reductions aren’t going to help the man on the street until those 18-35% interest rates on credit card and $39 late payment and other onerous, overpriced fees are brought under control. All the interest rate reductions are doing is allowing the banks to make more money. They certainly haven’t passed any of that on to the consumer. Much of the stimulus package monies will be eaten up by usurious interest rates and profit driven fees.

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