What is an Offer in Compromise?
If you are unable to pay a tax debt in full, and an installment agreement is not an option, then you may be able to take advantage of the IRS’s Offer in Compromise (OIC) program. Generally, the OIC program should be viewed as a last resort, after taxpayers have explored all other available payment options.
Here’s how it used to be under the original Offer in Compromise program: When you complete IRS Form 433-A to accompany the offer request, you state your monthly income and expenses. The difference between the two numbers is multiplied by 48 if you intend to pay off the offered amount in less than five months or it’s multiplied by 60 if you intend to pay it off over a longer period of time. So if your income is $3,000 per month and your “allowable” expenses (more on that later) are $2,900 per month and you intend to pay off the compromised balance immediately then the IRS, given all other qualifications have been met, will be willing to accept $4,800 plus the net “quick sale value” of your assets in which you have equity. It doesn’t matter if you owe them $10,000 or $100,000, this is what they are willing to accept.
The little quote marks surrounding allowable expenses indicates the area most taxpayers misunderstand when it comes down to how their offer is calculated. The IRS has a set of National Standards to determine expenses related to housing, transportation, and household expenses. For example, if your house payment is $2,500 per month but the National Standard for your particular area is $1,400 per month, the IRS will use that number instead. Live some place cheaper is the agency’s motto.
As you can see, what you assume are your bona fide expenses may differ from what the IRS calculates, and the agency previously didn’t consider unsecured debt. When it comes to monthly payments to credit card companies, the IRS’ stance is “let them stand in line behind us.” That’s why it’s important to crunch your numbers with a tax pro who understands the OIC process to make sure you have a valid offer.
The IRS now has new, more relaxed National Standard tables for housing, transportation, and household expenses. The agency is willing to accept higher costs. In fact, a miscellaneous allowance will be included where a certain percentage of credit card payments can be listed as an allowable expense. Previously, student loan payments and delinquent state and local income taxes were not allowable expenses, but now those numbers will be considered in the formula.
The best news is that the multiplier is being reduced: Instead of taking the disposable income amount and multiplying it by 48 or 60, it will be multiplied by 12 or 24, respectively. And if you have income-producing assets in a viable on-going business, the equity in those assets will not be considered when adding the value of total assets to disposable income.
The IRS wants to work with taxpayers and businesses to ensure productivity in this bad economy. So if you have a big tax liability and you’re on the broke side, fill out Form 433-A, take it to your tax pro to crunch the numbers to see if you can settle for “pennies on the dollar!”An Offer In Compromise is an agreement between yourself and the IRS or State that resolves your tax debt for less than the amount owed and achieve a reasonable tax settlement.
A tax debt can be legally compromised for one of the following reasons:
- Doubt as to Liability: Doubt exists that the assessed tax is correct.
- Doubt as to Collectibility : Doubt exists that you could ever pay the full amount of tax owed.
- Effective Tax Administration: There is no doubt the tax is correct, and no doubt that the amount owed could be collected, but an exceptional circumstance exists that allows the IRS to consider a taxpayer’s OIC.
You can compromise all types of taxes, penalties, and interest. Even payroll taxes can be compromised. The IRS accepts approximately 34% of all offers filed. If Total Tax Solutions can show that you qualify for this program, you can save thousands of dollars in taxes, penalties and interest.
Things to keep in mind when attempting to file an Offer in Compromise:
- You must be compliant for two consecutive quarters (6 months) before an offer can be submitted.
- The advantage of an OIC is that the amount paid is considerably less than what is actually owed, all principal and interest stops accruing and enforced collection is suspended.
- The disadvantage of an OIC is that you must remain current and compliant for 5 years after acceptance, and it’s a lot of paperwork.
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