This week, we are talking about owing the IRS money. In my book: Everything You Wanted to Know About the IRS – Audits, Appeals, and Collections, I discuss these topics in great detail. This week I will be providing condensed chapters from the book.
This week we have been focusing on how to get past an old IRS debt. On Monday we discussed the IRS’s Fresh Start Initiative, on Tuesday we talked about Installment Arrangements, Wednesday was about what your rights are with the IRS, and Thursday we went into appealing the amount that you owe. Today we are going to discuss Offers in Compromise.
You have probably seen commercials on television or heard radio ads of attorneys, or accountants telling you that they can settle your IRS debt for “pennies on the dollar.” What they are referring to is an Offer in Compromise (OIC). An OIC will stop any collection action that the IRS has against you.
An Offer in Compromise is an offer that a taxpayer makes to the IRS, which is less than the tax that the taxpayer owes. The IRS then compromises with the taxpayer, forgiving the debt for a lesser amount. There used to be a time that the IRS accepted less than 1% of these offers. Today they accept about 39%.
When tax liabilities are less than $50,000.00 and gross income is $100,000.00 or less, the IRS has liberalized their standards. In IR-2012-03 the IRS indicated that they are essentially limiting background research, relying to a greater degree on internal research, telephone communications with the taxpayer, and liberalizing expenses and future income calculations. Other adjustments to the Offer in Compromise program include:
· Considering future income for only one year, if the offer in compromise is paid in five or fewer months
· Considering future income for only two years, if the offer in compromise is paid in six to twenty four months.
· Considering more taxpayer-favorable computation of future income potential and living expenses
In considering these offers, the IRS takes into consideration your reasonable collection potential. Reasonable collection potential is the amount of money that the IRS thinks they can collect from you for your tax debts. Basically the IRS takes into consideration the liquidation value of your assets plus your monthly disposable income.
To calculate reasonable collection potential you file Form 433-A with your OIC. Basically, reasonable collection potential is calculated as follows:
· 100% of your cash, investments, and accounts receivable plus
· The realized value of your vehicles, real estate, and personal assets, plus
· Your monthly disposable income over a period of 48 to 60 months
The realized value of your assets is calculated by:
· Fair market value times 80% equals the Quick Sale Value
· Quick sale value minus Outstanding Secured Loans equals realizable value
For example if you owned real estate that has be appraised for $150,000.00; then 80% of the appraised value is $120,000.00. This would represent the Quick Sale Value. The balance of the mortgage totals $100,000.00; this leaves a realized value of $20,000.00. This amount represents the actual amount of cash that would be realized if you were to sell the real estate.
Monthly disposable income amount comes from Form 433-A. Generally, the figures that are calculated on the form, using the lower of your actual expenses or the IRS Collection Financial Standards are what the IRS takes into consideration. You would then subtract Total Living Expenses from the total income. Multiply this monthly figure by 48 months if you plan to pay off the OIC within 90 days, or multiply by 60 months if you plan to pay in installments over the course of 24 months. Using these figures you can come up with the offer amount.
Something to keep in mind; if your offer is accepted, the IRS will keep your tax refunds (if any) over the period of time that you are requesting to pay them over. In addition, the IRS will file a lien against you to protect the government’s interests, until the offer has been paid in full. Further you are agreeing to file your returns on time, and pay the amount of tax that you owe on time. Failure to do any of these requirements will result in the IRS nullifying the offer.
There are three reasons for which you can request an offer:
1. Doubt as to Collectability – This means that the taxpayer could never pay the full amount of taxes owed to the IRS. Doubt as to Collectability is the biggest reason an offer is asked for.
2. Doubt as to Liability - This means that the taxpayer doubts that they are actually responsible for the outstanding tax debt.
3. Effective Tax Administration – This means that the taxpayer has circumstances such that paying the tax would pose a serious economic hardship, would be unfair, and would be inequitable.
There are some potential disadvantages to filing an OIC they include:
· After your OIC is accepted, you must timely file all future tax returns and make all tax payments in full for five years
· Just submitting an OIC, whether it is accepted or not, extends the Statute of Limitations
· After the OIC is accepted, you give up your refund for the next five years
· After submitting the OIC you cannot later contest the amount you owe in court.
· In making the offer, you must thoroughly disclose your assets. If you don’t fully disclose your assets and your offer is accepted, the IRS can nullify the offer
· While your offer is pending and the IRS is investigating your assets, they may decide to audit you
These are the basics of how an Offer in Compromise works.
For more information visit www.smalleynco.com
If you have any questions you can email Craig W. Smalley E.A.
Author of the books: It Starts With an Idea – Tax Tips for Small Businesses available on Nook and Kindle, The Ultimate Real Estate Investor Tax Guide, available on Nook and Kindle, The Complete Guide to the New Tax Law – American Taxpayer Relief Act of 2012 available on Nook and Kindle, Everything You Wanted to Know about the IRS – Audits, Appeals and Collections available on Nook and Kindle, Tax Avoidance is Legal! The Complete Guide to Individual Income Tax available on Nook and Kindle, and The Complete Guide to the Affordable Care Act’s Tax Provisions available on Nook and Kindle