When the IRS announced its Fresh Start initiative back in 2011, hope abounded that tax balances would be more easily settled and taxpayer qualification criteria might generally be eased. Three years later, much of the evidence suggests that acceptance via the IRS’ offer in compromise (OIC) program is not as simple as many had anticipated.
In reality, OIC acceptance is quite rare. As a recent CPA Insider story detailed, a taxpayer’s qualification is not a subjective determination, but rather one that’s based on a specific set of computational formulas. As such, most taxpayers either don’t qualify or, when they do, ultimately can’t reach the offered payment amount. Given this relatively low rate of acceptance, it’s becoming increasingly clear that CPA firms must carefully scrutinize the facts and circumstances of each individual’s case, thoroughly examining them in order to come to a realistic conclusion regarding whether an OIC is a worthwhile pursuit. There are often better collection alternatives than an OIC, depending on the taxpayer, including installment agreements or examining not-collectible status options.
In 2013, the IRS reportedly approved only around 31,000 OIC applications, yet it negotiated some 4 million installment agreements for taxpayers seeking to repay their balances. That disparity alone illustrates how slim the chances for acceptance apparently are. But it’s worth exploring what, exactly, is causing so many taxpayers to be turned down for OICs.
Criteria that’s hard to meet and terms that may not be ideal
Essentially, a client must prove whether they can repay their tax debt before the collection statute expiration date. In order to provide such proof, the individual taxpayer is subject to a data analysis process, which goes over net equity in assets as well as estimated future income. Fluid as they are, these criteria are often the source of much debate and confusion and a primary factor in why it’s so hard for the IRS to definitively determine that a debt can or cannot be repaid within that window. Typically, the taxpayers who end up obtaining OICs are those whose situations display clear financial hardship that makes repayment by the expiration date essentially impossible.
However, even when a client does qualify for an OIC, that doesn’t ensure that they will receive one. On the contrary, the taxpayer must be able to pay an offer amount computed by the IRS based on a formula dictated by their anticipated income over the next 12 or 24 months. This is where accounting firms performing their due diligence often find that the offer amount is too high, or at least a risky proposition, and that other options aside from an OIC should be considered. Occasionally, a lump sum payment is preferable, but the number of OICs that are accepted compared with the number of taxpayers with outstanding balances indicates how infrequently that is the case.
The good news for most taxpayers is that, while OIC qualification and obtainment rates are low, the Fresh Start program has triggered some improvements in terms of the payment amounts indebted individuals are required to make. Future income multipliers – or the window in which the ability to repay was assessed – used to be greater, making qualification more difficult and computations generally more complicated. Under the new system, the criteria is more straightforward, meaning consultations between clients and firms are simpler even when the likelihood of obtaining an OIC is slim.
Ultimately, most taxpayers will agree that a more objective formula leaving less margin for error is preferred, which is part of the reason that even with low acceptance rates, the Fresh Start program represents progress. Clients may need to seek alternatives for repaying their outstanding tax debts, but outside of situations in which serious financial hardship is a mitigating factor, that’s probably for the better.