The TL:DR version: The IRS will throw out your offer in compromise if your returns aren’t filed. This will make it harder for people to successfully settle old tax debts.
A recent IRS policy change will make it even harder to settle delinquent tax debts. The IRS maintains an offer in compromise program that allows taxpayers to propose to settle delinquent taxes based on what the IRS would reasonably expect to collect. As mentioned in Accounting Today, the IRS has announced that they will now return offers received if all returns aren’t filed. While this seems like a sensible decision, this will negatively affect those who the offer in compromise program is designed to benefit, individuals who for whatever reason are out of tax compliance.
The previous policy was that the IRS would send a letter requesting any missing returns when an offer was received. If the taxpayer didn’t respond to the letter, the IRS would return the offer, which means it is considered closed with no appeal rights. This was especially helpful for self represented taxpayers, because they had an opportunity to correct the issue or identify IRS errors without having to start over.
Taxpayers no longer have this opportunity and this new policy means that if returns aren’t filed, the taxpayer has to start from the beginning and submit a brand new return.
The big problem with this policy is that it doesn’t account for IRS errors or honest mistakes.
The IRS is far from perfect and does make mistakes. Once the IRS returns an offer, it is very hard to have them reopened even if the IRS made an error. This means that even if the IRS or post office lost the return, the taxpayer likely will have to start over.
What makes this worse is that offers are already incredibly difficult for taxpayers to do on their own because of the complexity of the formula used to determine an appropriate offer.
Taxpayers now will have to verify that all returns are on record as filed or risk having to start over with a new offer. This is cumbersome for individual taxpayers due to the lack of an efficient and simple process to check IRS records.
Consequently, this change will make it more difficult for taxpayers to propose offers and have them accepted without professional advice. It will be even more important than before for self represented taxpayers to seek out help because of the risk of having to start from scratch.
If you have concerns about your offer in compromise, don’t wait for the IRS to destroy your hard work! Click here to be connected with a knowledgeable local tax professional today.
Geoff is an enrolled agent and CPA who worked for one of the largest tax resolution firms in the US. He has extensive experience in proposing successful offers in compromise with unusual or complex circumstances.