Archive | December, 2012

Tax Resolution- Offer in Compromise

10 Dec

An Offer in Compromise (OIC) is a method for a taxpayer to extinguish an outstanding tax liability with the IRS at a reduced rate. The taxpayer will offer a reduced amount to settle their tax debt based on two factors, liability of the tax debt and ability to collect the debt. The taxpayer must be current on filing all taxes, including estimated taxes and cannot be in bankruptcy to be eligible.

In the past, the majority of Offers in Compromise were rejected. Of the 258,000 offers submitted in the past five years, only 26% were accepted by the IRS. However, the IRS has issued new guidelines that may allow more taxpayers to take advantage of the Offer in Compromise program.

If the OIC is based on liability issues, it is essentially an issue of whether the IRS is correct in its assessment. It is essentially a dispute of the tax owed. Rather than appealing an assessment, the taxpayer offers a reduced amount as a settlement.

If the OIC is based on the ability to collect the tax, the IRS looks at the Reasonable Collection Potential (RCP) of the taxpayer. The IRS will consider the equity value of all assets of the taxpayer, plus the net income of the taxpayer for the next year or two. The IRS has monthly expense standards it uses to determine the net income of the taxpayer.

Equity value of Assets

The IRS will look at all assets of the taxpayer, including real estate, retirement accounts, the cash value of life insurance, vehicles, accounts receivable, etc. to determine the value of assets. Though secured debt, such as mortgages and car loans, are deducted from the fair market value of the asset, unsecured debt is not permitted to offset the value of all assets.

In 2012 and beyond, income producing assets that are essential to the taxpayer’s business are not included as assets. This provision will greatly help self-employed individuals and small business owners.

Net Monthly Income

To calculate net monthly income, the IRS uses standardized financial collection standards to determine expenses. The gross wages, pension and retirement income, Social Security, business and rental income are added to determine gross income. State and federal taxes are deducted. Both the taxpayer and the taxpayer’s spouse’s income is included, even if only one owes the tax debt.

The IRS standard allowances for monthly expenses can be found at http://www.irs.gov/Individuals/Collection-Financial-Standards. The financial collection standards provide for certain allowances for housing, transportation, car payments, food, personal items, clothing and utilities. The standards are based on family size and in some cases, the geographic area in which a person lives.

Normally, the IRS did not allow for payment of unsecured debt, such as credit cards and student loan obligations. For 2012 and beyond, the IRS has increased a miscellaneous allowance that may be used for these debts.

In prior years, the IRS looked at the net monthly income of the taxpayer and multiplied that figure by 60, or five years, to be a part of the offer in compromise. That figure has been lowered to 12 or 24 months, depending on how long the taxpayer needs to pay.

This change should allow many taxpayers to now qualify. In prior years, if the taxpayer had $300 net monthly income, the Offer in Compromise would be $18,000 plus the value of assets. Under the new rules, the Offer would be between $3,600 and $7,200 plus the value of assets.

Taxpayers Most Likely to Obtain an Offer in Compromise

Often, it is the taxpayer who has little, or is heavily burdened with secured debt that will have the best chance of success. Those with little equity in their property and vehicles, or those who do not own real estate or have a retirement account will have less in assets.

Likewise, those with high monthly expenses due to secured debt, or those living in an area with higher average expenses will most likely have less monthly net income. Those with a great deal of equity in their home or with high unsecured debt will be least likely to have a success.

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