Offer-in-Compromise Scams Expected to Increase

Predatory firms that exaggerate their ability to help taxpayers settle their tax debt have proliferated in recent years, using increasingly sophisticated methods in their misleading marketing materials. This summer, for the first time, the IRS included these shady operators in its annual Dirty Dozen list of tax scams.

While many tax debt resolution businesses are legitimate, others cross ethical boundaries, harming vulnerable taxpayers and spreading unrealistic expectations about settling tax debt for less than the face amount owed.

Predatory debt relief firms often lure desperate, financially strapped taxpayers through precision-targeted direct-mail campaigns and are really not following through with the services that they promise they’re going to provide.

The several thousand dollars they charge is unjustifiably high especially because the IRS generally uses a straightforward mathematical calculation in deciding whether to accept an offer in compromise (OIC).

The problem will probably grow worse during the COVID-19 recession as a greater number of taxpayers struggle financially and face possible tax troubles. The recession, in fact, is the reason why the IRS added “offer-in-compromise mills” (OIC mills) to its annual Dirty Dozen list.

Many OIC mills use sophisticated marketing techniques such as monitoring public records for tax lien information and then mailing the affected taxpayers misleading letters that warn of drastic consequences if the person fails to contact an “800” phone number. Some of the solicitation letters mislead recipients by uncannily resembling official IRS notices.

Taxpayers should remember “buyer beware”. The IRS reminds taxpayers to be cautious about whom they hire and to carefully “avoid giving their hard-earned money to the few bad apples in the industry.”

Strict rules govern when the IRS can compromise tax debt. In most cases, the IRS will reject an OIC that is less than what it calls the “reasonable collection potential” (RCP), which is a measure of the taxpayer’s ability to pay. RCP includes the value of the taxpayer’s assets, such as bank accounts, motor vehicles, and real property. It also includes anticipated future income minus certain amounts allowed for basic living expenses. The IRS has a limited amount of wiggle room to depart from the RCP test in hardship cases (see Regs. Sec. 301.7122-1(c)(3)(iii)). To submit an OIC, use Form 656, Offer in Compromise.

While most OICs are based on the taxpayer’s inability to pay the tax debt (doubt as to collectability), an OIC can also be used when there is a genuine dispute whether the taxpayer in fact owes the taxes (doubt as to liability). Because other procedures are available to dispute tax liability, taxpayers should rarely need to rely on an OIC to do so. In appropriate situations, though, they can use Form 656−L, Offer in Compromise (Doubt as to Liability). For more information about OICs, contact our office.