IRS Offer in Compromise Requirements

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.

The Truth About Settling Taxes for “Pennies On The Dollar”

Every year we here from taxpayers who have IRS debt and are looking for a solution.  Inevitably, they will also make a reference to the possibility of settling their debt for less than what they owe.  What usually follows is a conversation about what this actually means and how most people DON’T qualify for it.  Let us elaborate.

In advertising, you’ll hear companies talk about settling back taxes for 20%, 10%, or even less than the original balance.  What these ads, and the sales people whom you talk to on the phone, are trying to sell you is an Offer in Compromise service package.  This package is a reference to the IRS Offer in Compromise (OIC) program, which allows eligible tax debtors to pay the IRS an amount of money that is less than what they owe in order to wipe out their entire tax liability.

The phrase “pennies on the dollar” was actually determined several years ago by the IRS to be a form of deceptive advertising.  As a result, they explicitly instruct licensed practitioners that using this phrase is a violation of Circular 230, which is the handbook us practitioners must follow when working with the IRS.  However, since the IRS doesn’t always have jurisdiction over firms that just market these services, it comes into the FTC’s purview to look out for these deceptive marketing practices.

Some ads, web sites, and salesmen are out there trying to convince taxpayers that what you settle for is some fixed percentage of your tax debt.  However, this is blatantly incorrect. There is absolutely no provision in the tax code for allowing a taxpayer to pay a set percentage of their tax liability and just calling it good.  This has never existed, and most likely never will.

Instead, the amount of your OIC settlement is calculated using a very, very strict formula.  What’s even better is that this formula is NOT secret — it’s available on a worksheet in IRS publication 656B.

Based on this formula, if you have equity in assets that exceed your tax debt, you simply don’t qualify.  Period.  End of story.  For most individuals, the common thing is going to be equity in your house or rental properties, or perhaps equity in a collection of classic cars, stamps, coins, guns, art, etc.  If the value of ANY of that stuff is greater than your tax debt, you do not qualify for the OIC and cannot settle for “pennies on the dollar” – there is no way around this.

In the same vein, if you are a high income earner, it’s also highly unlikely you will qualify for the OIC.  The reason for this is that the IRS only allows certain amounts of money every month as “eligible expenses” for housing, cars, food, etc.  If your lifestyle exceeds these amounts, the IRS doesn’t care — they will only allow you to claim the National Standard expenses. Any monthly income over those amounts gets multiplied by either 48 or 60, and THAT number goes into your offer amount.

In these circumstances, you may qualify for a period of up to 12 months to make a “lifestyle adjustment” and reduce your living expenses to come into line with IRS standards. This will often involve selling luxury homes and getting rid of toys such as cars and boats.  Keep in mind that these items are all covered by your tax lien, so any proceeds from the sale of these items technically is owned by the IRS, and should be paid over to them. A good tax representative can assist you with structuring these sales so that both you and the IRS get something out of it.

In closing, beware of anybody promising that your tax debt can be settled for some fixed percentage.  That’s not the way it works and a skilled professional can show you if you stand a chance at qualifying for the OIC.  Anybody trying to sell you on the percentage idea might as well be selling you swampland in Florida, and you’ll be best served to seek assistance elsewhere.

By |2013-06-05T12:34:33-06:00June 5, 2013|Categories: IRS Talk|Tags: , , , , , , , , , , |Comments Off on The Truth About Settling Taxes for “Pennies On The Dollar”

How To Deal With IRS Debt

So these little envelopes that read “Official Business – Penalty for Private Use, $300” kept showing up in your mailbox.  You kind of had an idea of what they were about since they said they were from the Department of The Treasury.  But you figured that if you ignored them they might go away.  Or maybe you just needed a little more time to save up some money so that you could settle your debts.  But time kept passing, you never settled up and the letters kept right on coming.  When you finally decided to open one of those envelopes, it said that the IRS was in the process of levying you.  Now what?

If you are faced with tax related debt, it’s important that you take the following steps as soon as you can:

Own the situation.  All difficult situations only get worse the longer that you prolong dealing with them.  Think about it, does that achy tooth get better by itself?  Will that funny noise your car is making just go away if you ignore it?  Do those termites in your house stop munching on everything if you just pretend they aren’t there?  The answer to all of the above is no.  The first step to dealing with tax debt is to own up to it and start the process of resolving it.

Assess the damage.  We recently were dealing with a client who hadn’t filed taxes for 6 years.   They didn’t want to deal with the situation because they figured they owed thousands of dollars.  Well, when we prepared their returns it turned out they only owed about two thousand dollars – initially.  Because they didn’t deal with it early on the IRS penalties and interest just about doubled the initial balance owed.  Thus, it’s important that you assess just how much is owed as soon as possible.  Our experience has been that the situation typically isn’t as bad as a taxpayer thinks.  Additionally, if you are willing to work with the IRS you will find that they’ll reciprocate.

Seek professional help if needed.  Some tax debts can be settled without too much professional assistance.  Did you know that if you owe $50,000 or less in combined individual income tax, penalties and interest you can apply online for an installment agreement?  Yup, no need to speak to anyone at the IRS or have a professional get involved.  Now that is, of course, if you can make the payments.  If you owe a lot, don’t have substantial assets or just can make any sort of “significant” payment, then maybe you should have a professional look at your situation.  They may be able to recommend options that can help you pay your debt AND not put yourself under financial stress while you do so.

Ensure that your professional is qualified.  There are lots of boiler room tax resolution firms out there that will promise you they can settle your debt for pennies on the dollar.  When reviewing any firm, make sure that they have the following:

  • Professional, and Useful Website
  • Successful Track Record
  • Friendly, Helpful Representatives
  • Easy-to-Understand Fee Structures
  • Free Analysis and No Guarantees

Figure out your options.  When it comes to tax resolution, many people hear the advertisements touting how they can settle for less than they owe (i.e. an offer in compromise).  While this is in fact true, this is not the case for 80% of taxpayers because they will not qualify for an OIC.  You have to remember that the IRS is the collections arm of the US Treasury and that they are not in the business of giving away free money.  With that said, tax resolution typically falls into the following categories:

  1. File unfiled tax returns
  2. Dispute the tax debt on technical grounds
  3. Request penalty abatement
  4. Request innocent spouse relief if the debt was the fault of your spouse or ex-spouse
  5. Pay the tax debt in full
  6. Request an installment agreement
  7. Put the debt into currently not collectible status
  8. Apply for an offer in compromise
  9. Await expiration of the collection statute expiration date

Move forward.  Once you outline your arrangement to resolve your tax debt, make sure that you have a plan in place so that you don’t create any new debt.  For example, if you receive most of your income via 1099, make sure that you make estimated payments though out the year.  Lastly, take a personal vow to never generate tax debt going forward.  While there are numerous people you can owe, the IRS is really the only entity that can make your financial existence almost unbearable if you let it get that bad.  Thus, let’s all try and stay on their good side shall we?

Until next time…

By |2013-04-28T23:01:06-06:00April 28, 2013|Categories: IRS Talk|Tags: , , , , , , , |Comments Off on How To Deal With IRS Debt
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