IRS Offer In Compromise
By Steven A. Leahy
There are six things you can do if you owe the IRS money. First, you can simply write the IRS a check for the full amount. For many, that is simply not a realistic option. Often, if the tax obligation is not too significant, borrowing money from another source (friends, family, bank loan, credit cards, etc.) may be a less costly alternative than an installment agreement with the IRS. Second, you can enter into an Installment Agreement; pay the IRS over time. Third, you can obtain an Offer-in-Compromise: A lump sum settlement for less than the tax owed. Fourth, you can be declared Currently Not Collectible; pay the IRS nothing (for a period of time). Fifth, you can file for protection under the bankruptcy code; Chapter 7, Chapter 13 or Chapter 11. And the last option – you can do nothing, and let the IRS do what they will to you, your family and your assets.
This article addresses the third option – IRS Offer in Compromise (OIC). An OIC permits a taxpayer to settle their tax debt for less than the full amount owed. The good news is, in May 2012 the IRS revamped the process with its “Fresh Start” initiative, making it easier for taxpayers to take advantage of an OIC.
The first requirement for an IRS Offer In Compromise, as in all IRS payment programs, is compliance. The taxpayer must have filed all tax returns, made all required estimated tax payments for the current year and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees. The taxpayer must remain in compliance during consideration and, should the OIC be accepted, after approval.
There are three grounds the IRS may use to accept an OIC: Doubt to liability (a genuine dispute as to the existence or amount of the correct tax debt under the law), Doubt to collection (taxpayer’s assets and income are less than the full amount of the tax liability), and effective tax administration (payment of the IRS liability would create an economic hardship or would be unfair and inequitable because of exceptional circumstances). Most OICs are granted as to doubt to collection. An OIC can be paid in two different ways – Lump Sum (paid in 5 or fewer installments) or a Periodic Payment offer (paid in 6 to 24 installments).
A successful OIC must offer an amount equal to, or greater than, what the IRS determines is a reasonable collection potential. The reasonable collection potential is the amount the IRS determines the taxpayer has the ability to pay. The IRS will evaluate the taxpayer’s ability to pay, income, expenses, and equity in assets to make that determination. How that information is presented may be the deciding factor.
Before the Fresh Start Initiative, the IRS calculated the reasonable collection potential by looking at the taxpayer’s disposable income – actual income less “allowable expenses” (not the taxpayer’s actual expenses) multiplied by 60 (number of months for 5 years), plus “net realizable equity” of the taxpayer’s assets. For example, a taxpayer with a monthly income of $5000.00 and allowable expenses of $3000.00, with zero assets, may get an OIC approved for $120,000.00 (60 x $2000.00) – no matter what they owed the IRS. Not really an attractive option.
Under the Fresh Start Initiative, the IRS has allowed more flexibility in “allowable expenses” and the multiple has been reduced from 60 to 12 (if the OIC will be paid in a Lump Sum) or 24 (if the OIC will be paid in a Periodic Period). Let’s assume the new flexibility reduces our example’s disposable income to $1000.00 – the new OIC that may be accepted would be $12,000.00 if paid in a Lump Sum or $24,000.00 if paid in a Periodic Plan. Quite a contrast from the pre-initiative number of $120,000.00!
So, if you owe the IRS and are unable to pay the full tax obligation immediately, you may be eligible to pay the IRS less, much less, than you owe. Before you do anything, you should give me a call. We can discuss your all your options. Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.