On June 7, 2022 the IRS issued IR-2022-119 as part of its annual Dirty Dozen advisory. In this information release the IRS warned individuals with outstanding taxes to avoid predatory companies that falsely claim they can resolve unpaid taxes for pennies on the dollar. I totally agree with this advice but have trouble with the remainder of the message which said “taxpayers can usually get the best deal by working with the IRS directly to resolve their tax issues.” My experience with offers does not lead me to the conclusion that a taxpayer working directly with the IRS will get the best deal, or any deal. Maybe the IRS has some data on the number of taxpayers who successfully navigate the offer system that would surprise me. I would like to see the data on how many taxpayers who enter the offer process pro se end up with a successful offer whether or not that offer represents the best offer possible.
My students have taught me that most people will struggle significantly if they attempt to work an offer pro se.
Each semester in the clinic seminar I devote one class to offers in compromise. Prior to the class I give the students a fact pattern originally developed by Les Book when he ran the Villanova Tax Clinic and refined by me over the years. I have done this for 15 years across 29 semesters with one semester off for good behavior, aka, a sabbatical. Each semester I chart out the offers that the students present to show them how their offer compared with their counterparts. Each semester I get wild variations in outcomes.
The students attempting to prepare the offers represent highly educated individuals at elite law schools. I do not equate their abilities with the average taxpayer. Yet, they struggle to pick up all of the necessary concepts to properly present an offer.
The variations have gotten smaller over the arc of the 15 years because the offer form has improved. The form now guides taxpayers to claim an exemption for property. That change, which occurred five or six years ago, eliminated a trap that almost every student fell into in reporting the amount of property owned by a taxpayer that needed to be covered by the offer. Similarly, about a dozen years ago the IRS changed the form and the process to allow a taxpayer to exclude the value of a modest vehicle. I claim some credit for this change as I wrote a law review article explaining to the IRS why it should allow an exclusion for a modest vehicle and it accepted my suggestion.
The pre-qualifier program also provides a useful tool but one that does not take into account nuances that a seasoned practitioner would bring to the process. You can access the tool in a link through the information release. Similarly, the IRS has produced several videos to walk taxpayers through the process. These are also linked in the information release and are also helpful. Still, I think most taxpayers coming into the clinic will still struggle to properly prepare an offer without outside assistance from someone generally knowledgeable about the process.
Offer mills generally do two things wrong based on the observations of an outsider who does not intimately know their process. First, I think that they put people into the system who will fail. The offer mill wants the fee and allows the desire for the fee to overcome the need to dispense advice on what it takes to be a successful offer candidate. Second, I think that offer mills fail to follow through when the offer examiner inevitably comes back after six months and wants more information. Even if you put together a good offer for a viable candidate, the offer examiner in over 90% of the cases will ask for more data after reviewing the file and give a relatively short window for providing that data. To succeed in obtaining the offer, the taxpayer or the representative must respond in a timely manner to this post-review request. I might be wrong but I believe that at least some offer mills leave the response to the taxpayer and the offer fails at this point.
Other reasons may exist to explain why using an offer mill does not generally serve taxpayers well but the term offer mill itself suggests a business that seeks to take a taxpayer’s money without providing the appropriate services. The IRS does not regulate practitioners who submit offers just as it does not regulate return preparers. Taxpayers are left to the marketplace and businesses that have a model of doing a high volume of offers exist to fill the gap created by the difficulty in successfully navigating the offer process. The advertisement that an offer can resolve a taxpayer’s liability for pennies on the dollar is not necessarily inaccurate. It is possible to do that if the taxpayer has the right fact pattern. The ads of course do not mention that if you have enough income or assets to fully pay or substantially pay the outstanding liability, the IRS will reject the offer as it should.
A high number of taxpayers do not feel comfortable filling out a simple 1040 when their only income is W-2 income. How can the IRS expect those taxpayers to navigate the much more complex offer process? I don’t think it should without doing more to assist taxpayers to find qualified offer preparers or to prepare the necessary forms and navigate the necessary follow up. The pre-qualifier tool and the offer videos are good first steps but will not take most of the clients the clinic sees across the offer finish line.
I share the concern that offer mills make take money from taxpayers without getting them across the finish line to an offer. I don’t think all taxpayers can properly prepare an offer based on my observation of students trying to do this. If the IRS wants taxpayers to engage in the offer process without assistance, it needs to build a system that has a lot more hand holding. It has improved the offer form over the years, it has created the pre-qualifier tool but for many taxpayers there is still a long ways to go to make the offer process one they will navigate without some assistance.
If I am wrong and the IRS has data showing that a high percentage of pro se offers make it seamlessly through the system, that would be relevant data to produce. Understanding and duplicating the path to success as a pro se offer applicant is a good goal for the IRS to promote but I don’t think we are there yet.