The answer is potentially Yes. But, first what is an offer in compromise?
If you, the taxpayer, believe the IRS has inappropriately assigned you or your spouse a tax liability that is in error you may file a letter with the IRS requesting a lower liability. The process to do this is called an “offer in compromise” (a.k.a. OIC). This offer in compromise is a “negotiated tax agreement” with the IRS where you request the IRS to reduce your tax burden. The IRS uses the law and any relevant evidence you provide to determine whether to accept your offer in compromise. If the IRS accepts your offer, they will reduce your tax liability for the tax year in question. If they don’t, they may offer something different from your proposal.
When the IRS is evaluating whether to accept your offer, they are looking at your current income stream along with other evidence of your current and future tax profile. This is an important point to note. Why? If you are in the middle of a divorce and you end up negotiating a settlement with your spouse, that significantly shifts your tax profile (i.e. you get more income than you would have before your settlement). The IRS could come back to you and modify your offer in compromise. In other words, the tax liability that was lowered as a result of your financial challenges may later be increased if you are awarded more income through your divorce process.
So, if you have negotiated an offer in compromise with the IRS (or your state government), it is important to view this as a potential obligation of the marital estate and incorporate it into your settlement structure with your spouse. Why? As noted above, if the IRS comes back and increases your tax liability, you will now pay more to the government than you expected before your settlement was finalized. As a result you end up with less in your pocket. Yet, if you had foresight about these issues, you could incorporate the potential increase into your settlement structure to share this future obligation and make sure it was justly handled before you arrived at a final settlement.
In summary, if you are going through a divorce, be aware how offers in compromise impact your settlement structure. The financial components in your life need to be diligently managed. You may end up with a higher tax burden than you think and held responsible to pay the IRS even if you have a mutually negotiated, tax agreement (offer in compromise) in place with the IRS.
About the Author
Larry Smith is a Founding Partner of Divorce Outcomes, a specialized professional services firm that manages all of the financial aspects in a divorce process. Since 2003 he has worked as a trusted financial advisor, financial advocate, divorce architect and technical financial expert; he is not an attorney. He is an alumni of KPMG and Andersen with expertise in technical accounting, forensics, sophisticated taxation, management consulting, risk management, advanced process engineering, business combinations, divorce management, multi-party negotiations, advanced quality analytics and cognitive performance technologies. Since 1986 Larry has been advising individuals and organizations about innovative financial solutions to resolve complex financial challenges that arise in life and in business.
For both personal and business divorces, Larry is considered an expert in divorce strategies, divorce process management, financial divorce architecture, financial risk management, taxation for divorces, financial divorce forensics, advanced divorce analytics, financial divorce negotiations and mediation, business valuations and sophisticated equity structures. He helps clients shape complex financial decisions, manage communication risks and ever-changing negotiating positions to strategically preserve or grow wealth from these types of transactions.
If You Have a Question
If you have a question, feel free to contact me at [email protected] or 617-680-5222. The call is free. I will spend 30–60 minutes with you. I will provide you an honest assessment as to where I think you are positioned in your divorce process or answer any questions you have. I may provide you some guidance, insight or advice that you can take with you as you wish. There is no obligation to move forward. The phone call is designed to ease your fears, provide you some options to pursue and a potential road to run on that can lead you down a path to achieve a successful outcome.
About Divorce Outcomes
Divorce Outcomes is a specialty services firm that helps people both domestically and internationally manage all of the financial decisions that arise in their divorce process. We are not attorneys. We are financial experts who partner with our clients as their personal financial advocates. We help our clients manage their divorce process, uncover hidden financial risks, architect divorce solutions, manage ever-changing negotiating positions, communicate complex financial matters and close the divorce process as soon as possible with a goal to arrive at the best outcomes possible. Throughout the process we evaluate the current state of our clients’ financial lives with an objective to best reposition their future. We do not sell any products. We simply raise issues that are in our clients best interest. Our clients share with us we:
- unfold, analyze and repackage their financial life so they are well positioned after their divorce
- preserve the value of their business or marital estate
- continuously strive to provide a return on our services
- build balanced financial solutions grounded in evidence
- find ways to make our client, and at times both parties, money through the process
- design their divorce to work for them and their family’s life
- provide mental clarity to make decisions
- reduce the total process time from start to close
- minimize the stress and unpleasant memories that can last a lifetime
As we reach an agreed upon settlement structure, we help our clients identify a fitting attorney who can leverage the financial solution to draft and record the requisite legal documents. Where outcomes are at risk from a traditional process, we function as expert financial negotiators or financial mediators to turn around the situation and achieve our client’s desired outcomes.
This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute formal advice or a recommended course of action as every person’s situation is unique and different. The information here is not intended to be, and should not be, relied upon by the recipient to make a decision without professional guidance.