The Offer in Compromise Gets All the Attention, but A Payment Plan Gets Most of My Results

A client came to me owing the IRS $148,000 and asking for an Offer in Compromise because every ad he had heard said that was how you pay less than you owe.

His Offer was rejected over the equity in his home.

He is now paying $650 a month on a payment plan that will end after he's paid $31,200, and the remaining balance of more than $116,000 will expire.

That result came from a Partial Pay Installment Agreement.

In my own files, when a client ends up paying less than the full balance, it is far more often through one of these payment plans than through an Offer in Compromise.

That runs against nearly everything your clients are told, so I want to cover five things.

1. Everything Points Your Client Toward the Offer

National tax relief firms advertise one thing: settling for less than you owe. The IRS reinforces it with a dedicated Offer page and an online pre-qualifier tool.

So the client arrives believing that if they qualify for an Offer, they can save money, and if they don't, they owe the full amount.

2. How a Payment Plan Ends Up Costing Less Than the Debt

The IRS has ten years from the date a tax is assessed to collect tax owed. After that, whatever remains is no longer collectible.

A regular installment agreement sets payments high enough to pay the balance off before that deadline. A Partial Pay Installment Agreement sets the payment at what the client can afford, based on IRS standards, and the client pays that amount until the statute runs out.

My client had four years left and could afford $650 a month. Forty-eight payments of $650 is $31,200 on a $148,000 balance.

I never tell a client on one of these plans that he has settled. He owes the full amount on paper until the statute expires, but the savings are as real as they would be under an Offer.

3. The Facts That Get an Offer Rejected Don't Necessarily Stop the Payment Plan

This is the main reason my results look the way they do. The Offer has rigid rules about equity and expenses, while a partial pay installment agreement has room to negotiate on both.

The IRS took my client's home value from Zillow at $420,000 and counted 80 percent of it ($336,000). He owed $250,000 on his mortgage, which left $86,000 that the IRS requires to be included in the Offer amount. He didn't have it and couldn't borrow it.

On the payment plan, his inability to borrow was acceptable. A lender turned down his home equity loan application, and the denial letter showed the IRS that the equity could not be converted into cash. As a result, he was not required to pay it to the IRS.

Expenses are the second problem. I represented a nurse and her husband, a contractor, who owed $92,000. Their housing and utilities cost $2,950 a month, and the IRS standard for their area was about $2,450.

Offer examiners will not allow housing and utilities above the standards. The $500 difference would have been counted as money available to the IRS every month, and it raised the offer amount beyond their reach.

On the payment plan, I could argue for what they actually spend, because comparable rentals nearby cost more than their current payment. We negotiated $400 a month with six years left on the statute, which comes to $28,800 on a $92,000 debt.

Anyone who qualifies for an Offer also qualifies for a Partial Pay Installment Agreement, because if a client could pay the balance in full before the statute expires, the IRS would take the monthly payments and decline the Offer. The reverse is not true.

4. A Failed Offer Costs Your Client Time, and Time Is Money Here

While an Offer is pending, the collection statute stops running, and it stays stopped until 30 days after a rejection. Offers commonly take most of a year, or more, to resolve.

A restaurant owner came to me after a national firm filed an Offer for him. He owed $210,000 and had five years left on the statute. The Offer sat for eleven months and was rejected, mostly because of equity in his building.

By the time he hired me, five years had become six because the statute of limitations was extended while the Offer in Compromise sat waiting to be reviewed. We negotiated a Partial Pay Installment Agreement at $900 a month, which over 72 months is $64,800.

If he had gone to the payment plan first, he would have paid $54,000 over 60 months. The Offer that was never going to be accepted cost him about $10,800 in additional payments, plus the fee he paid a company to file it.

The payment plan is much quicker to negotiate, and once it is in place, the clock keeps running with every payment.

5. What the Offer Still Does Better

An accepted Offer ends the matter. The client pays the agreed amount, stays compliant, and is finished with the IRS (although the taxpayer must stay compliant for 5 years post-Offer).

The payment plan is not as clean. The client has to wait out the statute, a tax lien is filed, and the IRS reviews the client's finances within two years. If income has gone up, the payment can go up too.

For a client with no equity, expenses within the standards, and very little ability to pay, the Offer is the better resolution, and I file it. Nearly all the Offers I submit are accepted, because I only submit them for clients who fit.

That group is much smaller than the advertising suggests. For clients who own a home, live in an expensive area, or have a few years left on the statute, the partial pay payment plan is usually where the savings are.

TL;DR

⏩ Clients and professionals assume the Offer in Compromise is the only way to pay the IRS less than the full balance.

⏩ In my practice, clients pay less than they owe far more often through a Partial Pay Installment Agreement.

⏩ The payment is based on what the client can afford, and what remains unpaid when the ten-year collection statute runs out is written off.

⏩ Home equity and above-standard expenses get Offers rejected, but both can be negotiated on the payment plan.

⏩ A rejected Offer gives the IRS more time to collect.

⏩ The trade-offs are a filed lien, a financial review after two years, and waiting for the statute to expire.

The next time a client asks about settling with the IRS, you can tell them: "Not everyone qualifies for an Offer, but there are other ways to avoid paying the entire balance." Then introduce them to me.

BTW, I get the same three questions from CPAs and attorneys every time they have a client with tax debt. I finally wrote the answers down.

Want to understand your options before you call anyone?

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➥ Contact Attorney Stephen A. Weisberg for a free Tax Debt Analysis.

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Email: s.weisberg@weisberg.tax

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