In Business Offer in Compromise? There’s a Better Tax Resolution Solution

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Originally Posted On: https://solutions.tax-guard.com/resources/post/in-business-offer-theres-a-better-solution/

The In-Business Offer in Compromise (Offer) program can settle an IRS debt for less than the full amount owed. When a local accountant or attorney suggests an Offer, it is certainly a tempting option. Unfortunately, business owners and lenders alike rarely receive all the facts. The Offer program is usually an inferior option, especially when lending is involved. The likelihood of success is low. Protection for businesses and lenders is unreliable. The Offer cannot address asset-based lenders’ concerns regarding priority. Usually, the Partial Payment Installment Agreement (PPIA) is a better option for businesses and lenders.

The IRS only approves about 32% of all Offers submitted, per the 2021 IRS Data Book (14,288 of 44,809 submitted). The vast majority of accepted Offers are for individuals. The success rate for businesses is much lower because of (a) the formula the IRS uses to calculate the Offer as well as (b) public policy considerations.

The Offer formula is akin to the IRS turning the business upside-down, shaking, and taking what falls out. Generally, it is the sum of a business’s equity in assets and disposable income.

((Value of Assets * 80%) – Encumbrances) + ((Income – Expenses) * 12 or 24 months)

To calculate the equity in non-cash assets, multiply the fair market value by 80%, then subtract any encumbrances. The disposable income portion depends on whether the business will fund the accepted Offer within five months or 24 months.

• For accepted Offers paid within five or fewer months, the formula includes 12 months of disposable income.
• For accepted Offers paid within six to 24 months, the formula includes 24 months of disposable income.

Many businesses have considerable equity in assets and/or disposable income. For them, the Offer formula will likely yield a result greater than the actual liability to the IRS. In such cases, the IRS will not consider an Offer. The likelihood of a business realizing the hyped “pennies on the dollar” savings is very low.

As of April 25, 2022, the IRS now requires “the taxpayer to make all required federal tax deposits for the current quarter and the two preceding quarters prior to offer submission. The taxpayer must continue to stay in federal tax deposit compliance through the investigation of the offer and through the monitoring period for accepted offers.” If even one federal tax deposit is made one day late (resulting in a deposit penalty), the IRS can return the Offer without appeal rights. It’s unrealistic to think that a struggling business can maintain a perfect compliance record for more than two years (six months prior to submission + 12-month investigation + 6-to-12-month appeal). In contrast, the Partial Payment Installment Agreement described below offers much more flexibility.

Even if the formula yields a result less than the actual liability, most businesses cannot fund an Offer. Most businesses cannot afford the payments, in large part because the formula does not make sense. For example, the formula requires the business to pay 12 months of disposable income over five months. A business with disposable income of $2,500 per month inherently cannot make a payment of $6,000 per month ($2,500 * 12 months divided into five monthly payments). Additionally, including equity in the calculation increases the required monthly payment, which further decreases the likelihood of funding the Offer. The formula almost always yields a monthly payment exceeding disposable income, which a business cannot fund through its cash flow.

It’s possible for the IRS’s formula to calculate a small Offer, which the business could fund. However, the IRS takes into account public policy considerations that increase the likelihood of rejection. The IRS does not want to give one business an “unfair” competitive advantage over another, particularly over businesses in compliance with filing and paying requirements. These considerations typically require a minimally acceptable Offer amount to start with the unpaid portion of the original liability.

Because of the low likelihood of success, an Offer only provides lenders with limited protection. While the Offer is “pending,” IRS should not levy bank accounts or receivables. However, the most likely outcome is the IRS returns or rejects the Offer, exposing the lender to levy or conversion.

Generally, local accountants and attorneys are not sensitive to lenders’ concerns, e.g., priority and the 45-day rule. More likely than not, the IRS will file a federal tax lien when rejecting or returning the Offer. The IRS could also file a lien during the initial review of the proposed Offer. If so, the 45-day window will expire before securing the documents a lender needs to maintain priority on its secured interest – an installment agreement and subordination of federal tax lien. Additionally, a prerequisite or requirement for a subordination is an installment agreement in good standing. As such, an IRS Technical Advisor will reject a request for a subordination unless there is an installment agreement in place. A “pending” Offer doesn’t satisfy the requirement.

The Offer process is essentially a drawn-out game of hurry up and wait. The business sends an application to the IRS with the necessary supporting documents, e.g., bank statements, proof of expenses, etc. Typically, three-to-six months pass before the initial response from the Offer Specialist. The Offer Specialist will, most likely, indicate the information is now “stale” and request updated documentation. After the business provides updated information, the Offer Specialist will likely disappear again. This “process” typically repeats another time or two over a 12-month period. The most likely outcome is that the IRS rejects the Offer. This is especially frustrating given the time, effort, and expense involved.

Businesses submitting Offers get stuck in “no man’s land” when the IRS files a federal tax lien. Offer Specialists disappear for weeks or months. Upon discovering a lien, it’s unlikely a business owner can reach an Offer Specialist and explain the urgent situation. Additionally, Offer Specialists usually cannot consider alternatives to an Offer, e.g., an installment agreement. Instead, Offer Specialists will return the case to the Revenue Officer to discuss the installment agreement. It can take months for the IRS to reassign the case to a Revenue Officer. Most likely, the 45-day window to address all the issues will expire with no resolution. The business is now stuck in “no man’s land” awaiting a response from the Offer Specialist or reassignment to the Revenue Officer. Either way, there is no protection for the lender, who stops funding.

Pursuing a Partial Payment Installment Agreement (PPIA) instead of an Offer is mutually-beneficial for businesses and lenders. A PPIA is an agreement that the IRS acknowledges will not pay the full amount owed. Instead, the business may repay only part of the liability over time. Monthly installment agreement payments are based solely on disposable income. Equity is not part of the calculation, which solves for the disparity created by the Offer formula. Additionally, the IRS has limited time to collect taxes owed. Generally, the Collections Statute Expiration Date (CSED) is 10 years from the date the IRS assesses the liability. With a PPIA, a business pays what it can afford until the CSED expires. This is the case even when it will not ultimately repay the liability in full.

PPIAs provide businesses and lenders with better protection than an Offer. The IRS cannot issue levies or file liens while an installment agreement is in good standing, for 30 days after rejection of a proposed agreement, or for 75 days following the notice of intent to terminate an agreement. When there are issues with an agreement, it is important to identify and address them quickly. Tax Guard works with businesses and lenders to resolve any issues and keep the agreements in good standing.

With a PPIA in place, a business can secure a subordination of federal tax lien. The subordination puts the lenders’ priority ahead of the IRS. The two documents protect lenders from IRS levy (installment agreement) and lien (subordination). This combined protection eliminates the timing issues in the Offer process, so the funding relationship can continue long-term.

When federal tax issues arise, don’t wait for the IRS to file a tax lien or issue levies. Be proactive. Fill out the form below to speak with a specialist.