Offer in Compromise: Don't File Just Because You Can

A tax attorney hears all kinds of stories about errors committed by tax preparers or injustices perpetrated by the IRS.  People often ask me (sometimes jokingly) “Can I sue them?”  My answer is usually, “No, you don’t have a cause of action;” or “No, you don’t have any real damages;” or “No, they are protected by the contract that you signed.”  But technically my response should be “Yes, you can, however…”

You can always file a lawsuit.  The question is how far is it going to get you?  If you file a frivilous lawsuit, chances are it won’t get you very far.  If an initial assessment is not done to determine the strength of your case and the likelihood of success, there is a higher likelihood that it will be dismissed.  Depending on the circumstances, filing a frivilious lawsuit could also result in you having to cough up money for sanctions and attorneys fees.

Although I have never seen anybody sanctioned or penalized for filing a frivilous Offer in Compromise (OIC), the same principle applies: you have to take a careful look at the strength of your case before you decide to file.  And I cannot overemphasize the value of having a trained set of eyes — preferably a tax attorney or an experienced CPA — to help you with this important step.  These are just some of the negative consequences of filing an OIC that is ultimately rejected:

  • Loss of $150 filing fee
  • Loss of 20% OIC deposit (applied to outstanding balance)
  • Loss of time involved in preparing and negotiating (typically no less than 6 months, and often closer to 12 months from start to finish)
  •  Lengthening of the Collection Statute Expiration Date / Statute of Limitations on collections (the time period is paused when the offer is filed/”pending” and does not start to run again until 30 days after it is returned or rejected)
  • Penalties and interest continue to accrue during the time your OIC is pending, and must be paid if the offer is not accepted

There are many disreputable tax resolution firms that will “sell you” an Offer in Compromise service without doing their due diligence on the front end.  First, they know you want to settle your case for less than what you owe.  Second, they really only care about closing the deal.  And third, they know that anyone can file an OIC by simply filling out the right forms and attaching the right fees.  When considering who you should hire for tax resolution services, look for somebody who offers a free and thorough consultation before any work is done on your case.  Find somebody with enough integrity to help you determine the best way to resolve your case, rather than just tell you what you want to hear.

So, the question should not be “Can I sue?” or “Can I file and OIC?”  The better question is “If I sue, what is the likelihood of success?” or “If I file an OIC, what is the chance the IRS will accept it?”

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