By now, you’ve undoubtedly heard the radio commercials: “Settle your tax debt for pennies on the dollar…”
What these ads are referencing is an IRS program called an Offer in Compromise or OIC. This program does allow you to pay a reduced amount of money as full settlement of your entire tax liability, including penalties and interest. However, it’s not as simple as the commercials make it sound.
Most of those commercials will make one think that you simply take your tax debt, multiply it by some percentage and then you just pay them that amount and walk away. Unfortunately, that is not how it works.
Part of determining whether you are even eligible to apply for an OIC has to do with the formula used to decide how much you will need to pay. The formula is somewhat complicated, but an overly simplified version of it looks something like this:
- Add up the value of everything you own: House, cars, furniture, jewelry, undergarments, stocks, bonds, cash, retirement accounts, tools, goats, art….EVERYTHING. Call this number “A” – it represents the value of your assets.
- Subtract your allowable expenses (the IRS won’t let you claim all actual expenses) from your total income. Call this number “B” – it represents yours remaining income (this is what the IRS calls it – not your disposable income, which is probably less).
- Multiply “B” times either 12 or 24, depending on how long you’re going to take to pay off the Offer in Compromise. Call this new number “C”.
- A + C = Z, where Z is the amount of money you can settle your tax liability for.
Here’s the kicker: If “Z” is more than what you owe the IRS, then you’re not eligible for the program. The result? You’re probably going to end up paying monthly payments on an Installment Agreement.
In addition to this formula, there are some other conditions for OIC applicants:
- You must file all missing tax returns.
- You must keep your nose clean with the IRS for 5 full years, otherwise they will re-bill you for everything they forgave.
- You must make the OIC payments on time.
- You must pay an application fee, unless you meet the low income guidelines.
- If you end up being owed a refund on next year’s tax return, the IRS is going to keep that refund money.
The real problem for most people with the Offer in Compromise application process has to do with the part where they multiply your remaining monthly income by 12 or 24. If you have $1,000 per month left over, and are going to take a year to pay off the Offer in Compromise, then you multiply by 24 to get to $24,000. Well, if you also have $20,000 equity in your home, and no other assets, then your Offer amount is $44,000. If you owe the IRS $35,000, you’re not eligible for the Offer in Compromise program.
It’s worth noting that, in March 2012, the IRS changed some of the Offer in Compromise rules. The single biggest thing they did was to REDUCE that multiplier — it used to be 48 or 60. For taxpayers with no assets, this change effectively reduced the necessary offer amount by up to 75% — making potentially hundreds of thousands of people eligible for the program that didn’t used to be.
HOWEVER….the IRS can change this back at any time. If you are even thinking about applying for an OIC do it now! Feel free to call our office at 773.239.8850 and we’d be happy to help you get started.