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Preparing Offer in Compromise

2008-06-30 by

Today TaxMama hears from Michael in AZ who’s grousing. “According to the IRS I owe over $10,000 dating back to 2000. I recently filed 2003-2007. My files show, before penalties and fees, approximately $8,000. I was told “less than 10% of those who self file for an offer in compromise get approved. several tax places wanted $2500 to do the offer. I can’t afford that. Can’t I do it myself?”

Dear Michael,

There is a some truth to what you’ve cited – the incidence of self-filed offers being accepted is low.

Why? Because individuals, who are not in the business of preparing offers day after day, don’t believe the instructions. They just can’t seem to get it into their heads that when the instructions tell them to include ALL the requested information with the offer, it MEANS include ALL the requested information, copies of documents, etc.

IRS rejects all incomplete offers. Period. So, if you want to do this yourself, fine. Do it.

But read the instructions in the Form 656 packet carefully. Perhaps three times.
http://www.irs.gov/pub/irs-pdf/f656.pdf

You don’t really need any other sites or advice. It really is all right there in the packet.

Then, gather all the information you need – copies of utility bills, bank accounts, insurance information, vehicle registrations – whatever applies to you. And gather the right number of months of each set of documents.

Prepare the correct forms – 433-A and/or 433-B to go with the 656.

And when you have them all gathered together, organize everything into a tabbed binder or folder so the IRS examiner can find each back-up document or sets of documents.

Then use the computation provided by IRS on pages 8 and 9 to determine how much your offer should be. It’s right there in the workbook. There’s no mystery.

Finally, make at least two extra copies of the entire set, in case IRS loses your precious file – and they have been known to do that.

And send it off to IRS via certified mail, return receipt requested.

If you can’t get everything together and some key bit of information is missing, don’t send in the offer.

a) IRS won’t accept it. Though you might get one shot to send additional information. You won’t be able to talk your way out providing something just because you can’t be bothered to take the time to track down the information. (IRS tells us that this is why most self-prepared offers get rejected.)

b) When you file an offer, you stop the clock on the 10-year statute of limitations that IRS has to collect. The clock stops for the entire time that the offer is open. It takes IRS quite a while to officially close the offer file. So you could be doing yourself double harm:

1) You’ve given IRS most of the information about where your assets are so they can seize them sooner.
2) You’ve just given IRS an extra year or so to collect from you.

So sure, do it yourself. But do it properly. And you’ll be just fine!

Remember – Mama knows best.

And remember, you can find answers to all kinds of questions about offers in compromise and other tax issues, free. Where? Where else? At TaxMama.com

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  1. Keith L. Reed Says:

    This is like putting the cart before the horse. First, he fills out his own tax returns, then want to know how he can get out of the mess he's created. He should have a competent professional look at the returns, to see if there is any way to reduce the balance owed on them. Then he should proceed with an OIC, using the same pro to assist him.

  2. Anonymous Says:

    Tax Mamma:

    Excellent advice. Although I am not a tax professional, I do negotiate regularly and consult on negotiations and your statement rings true for negotiations generally. Additionally, your explanation of the figurative costs of preparing a defective offer are very important for anyone consider.

    All the best,

    R

  3. Glenda Whitson EA Says:

    Using an Enrolled Agent with the IRS who specializes' in Offer in Compromise's is the best way to go. There's so much information to gather and everything must be current. Your not going to be aware of the rules and options available to you. If you are self-employed you must prepare a separate compromise for both the business and individual taxes.

    I have prepared many OIC's and so far have a 100% success rate in negotiating with the IRS based on the circumstances and the client's ability to pay. My clients have paid less than 5% of what they owed.

    The price for the offer varies depending on the complexity. If you are just a W-2 wage earner it would probably cost about $1,000. If a business is involved it will cost more.

    Beware of the TV and Online business' who promise you pay only pennies on the dollar! They don't care about you, they just want the fees. I have re-done OIC's for clients who used an online service and who used the wrong years forms and they were not completed correctly. The IRS rejected them and the company was no where to be found. I have been very successful because I take on only the cases I feel will have a sucessful outcome.

  4. Eva Rosenberg - Your TaxMama® Says:

    See, Glenda makes an excellent point. Ethical companies will not take your money. They will tell you that you are not an offer candidate.

    Incidentally, when I tell you that IRS rejects such a high percentage of self-prepared offers because they are incomplete, it's not my opinion.

    IRS's Offer unit has repeatedly told us that this is the problem. That's why they keep asking for ever more input on how to improve the offer in compromise forms and system.

    And if you go to IRS's forms page, you'll find at least three different versions of the Form 656, depending on your circumstances.

    IRS is trying – and so are all the tax professionals and other groups working with IRS's stakeholder teams whose sole job is to make taxpayer communications ever better.

    Unfortunately, too many people are still trying to take shortcuts.

    There are no shortcuts.

    This is simple. Follow instructions.

    Hugs

    Eva

  5. Michael Says:

    I will memorize those instructions…...fast.


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