IRS Offer in Compromise for Individuals
If you owe the government taxes, you need solid advice, not a salesman in your ear talking about 10% settlements and dashing good looks. This is not the time to be dazzled by cure-alls and flattery. You need real substance.
The Offer in Compromise is Not –
- Based merely on how much you owe,
- Based on a percentage of what you owe, or any other eyeball test, and
Here’s some quick guidance on the IRS Offer in Compromise.
How Do I Know if I Qualify for the OIC?
Eligibility first –
- You must be in current tax compliance
- You can’t currently be in bankruptcy
- If you qualify for an Installment Agreement that will full pay your tax liability, then you don’t qualify for the Offer in Compromise. Sorry, this disqualifies a lot of hopeful people.
- Your Reasonable Collection Potential (RCP, discussed below) must be lower than your total tax liability – tax, penalties and interest.
- RCP = Monthly Disposable Income x 12 or 24 months + liquidation value of assets
Calculate Your Reasonable Collection Potential
Income and Expenses
Use your household’s gross income for this part.
Your household income is calculated using all income earners in your household. Typically, this is a married couple, even if the tax liability is only attached to one person. This doesn’t mean the non-liable person will be held responsible. But, both incomes will be used to calculate the percentage of monthly expenses that will be assigned to the liable partner.
Example: if the liable partner brings in 40% of the household income, then 40% of the allowable household expenses will be used to calculate the Monthly Disposable Income (discussed below).
Expenses are a little more complicated, starting with limits the IRS applies to your monthly expenditures.
Collection Financial Standards – Limits on monthly expenses used by the IRS to help determine a taxpayer’s ability to pay a delinquent tax liability. Found at irs.gov, the Standards include:
- National Standards:
- Food, Clothing and Other Items
- Out-of-Pocket Health Care Expenses
- Local Standards:
- Housing and Utilities
Although the Collection Financial Standards seem to be clear cut, applying them to your monthly expenses is not. There are rules and exceptions to consider.
Although there are too many specific situations to talk about all the exceptions, here’s one example from the Internal Revenue Manual.
This exception is often available to taxpayers that commute a long distance to work each day. And believe me, the IRS won’t offer this one up to you.
The Internal Revenue Manual states –
“If a taxpayer claims higher amounts of operating costs because he commutes long distances to reach his place of employment, he may be allowed greater than the standard.”
IRM 126.96.36.199.3 (09-30-2013) Transportation Expenses
Equity in Assets
The IRS looks at everything you own to find out what it’s worth. They use the liquidation value of assets to calculate the Offer in Compromise.
- 80% - Typically, liquidation value of assets is calculated by taking 80% of the Fair Market Value of the asset and deducting the loan balance, if any.
- 70% - Retirement accounts are typically reduced to 70% to get the liquidation value.
How Much Do I Offer?
Calculate Your Offer Amount
- First, take your Disposable Monthly Income and multiply it by 12 and 24 months.
- Then, add your liquidation equity in assets to each number. Each of these numbers is your potential Offer Amount.
- Subtract your total tax liability, including tax, penalties and interest. This is the dollar figure you could potentially save by submitting an Offer in Compromise, depending on your ability to pay over time.
- Determine whether you can pay 20% of the lower number today and the remaining balance within 5 months of the IRS accepting your Offer. Expect the IRS to take 3-9 months to review your OIC. If you can pay it, this is your number, call us.
- If you can’t meet the payment terms of the lower Offer calculation (using 12 months), determine whether you can pay the larger Offer amount in 24 monthly payments, starting immediately. If the answer is yes, call us.
- If you can’t fund either Offer amount due to equity in an asset that you can’t liquidate, like your home, call us. You may qualify for a Partial Payment Installment Agreement, Currently Not Collectible status and/or Penalty Abatement.
Effective Tax Administration
If you show the ability on paper to pay your total tax liability, or you have equity in assets that equals or exceed the debt, there may be hope, if you are facing extraordinary circumstances.
The IRS has a thing called Effective Tax Administration (ETA), which means that the government will consider settling a tax debt for less if collecting it would be unfair.
Because the ETA is case specific, the situations that may qualify for it are endless and too numerous to write about in a blog post. If you think you qualify for the ETA Offer in Compromise, call us.