Offer In Compromise
(OIC) Problems
Before you submit an Offer
in Compromise, it is essential to
do an analysis of your finances so that
you can avoid potential
Offer in Compromise problems and determine if that is really the correct IRS tax settlement solution for you.
There are several alternatives to an Offer in Compromise and it really takes an experienced person to determine which
is the appropriate option.
One of the
biggest reasons not to submit an OIC is that the statute of limitations on collection will be suspended. The
IRS normally has 10 years from the date of assessment to collect a tax. When you submit an Offer In
Compromise the statute of limitations on collection is frozen from the time the IRS accepts the offer for
processing plus 30 days plus the time period any appeal is pending. Why risk extending this time period if
you have very little chance of having your offer approved. Its win-win for the IRS with nothing for
you.
Beginning in July 2006 the law changed as to
how Offer In Compromise deposits are treated. Under old law a deposit on an offer was not required and if you
did submit one it was returned if your offer was not approved. Under current law you are required to submit a
20% deposit on a lump sum offer, which will be kept by the Internal Revenue Service and applied to the balance
owing if your offer is not approved.
Under prior law, no payments were required
on a deferred payment offer or short- term periodic payment offer. Under current law monthly payments are
required while the offer is under investigation and if the offer is not accepted, the IRS keeps the monthly
payments and applies them to the balance owing. Currently the IRS has little incentive to approve an offer, as
they will keep the funds you have borrowed for the offer deposit as well as having the collection statute
effectively extended.
This does not mean that you should never
submit an IRS Offer in Compromise, but you you should have a good understanding of the type of financial
situation that will have a chance of getting an offer approved. If you own a home with any equity at all, it
will become part of your offer and many persons do have a substantial amount of equity even in the current real
estate market. Also, as you can see in the above calculations of future income, the amount of household income
substantially increases the amount of an offer. A qualifed tax professional will be able to help you decide if
an Offer in Compromise is the right course of action.
For example an offer amount can increase by
up to $6,000 for every $100 of future income and if you live in a community property state it is very hard to
keep this amount down if both spouses work. Putting assets into a trust will not work as the IRS will still
include all trust income and assets as yours even if the trust document shows you have a nominal beneficial
interest.
So what will
work? First, your income must be just enough to cover meager living expenses. This means you will not be able
to help with your children’s college tuition or pay for private school, as those expenses will not be allowed
in computing future income. Nor will credit card payments unless the expenses were incurred paying for
allowable living expenses. You should look at the national standard expenses and the allowable amounts for
housing, transportation and medical expenses to get an idea of what your income should be for your family
size.
If your income suddenly drops to an amount
that will get an offer approved, there should be a good reason. The IRS does not like taxpayers “structuring”
their finances to get out of paying back taxes. If you are self-employed earning a salary from a corporation
that you or a family member owns, the income of the corporation will also be looked at to see if it could also
be used in a future income calculation.
As previously mentioned, any assets with
equity will be computed as part of your Offer in Compromise. The equity in boats, jet skis, vacation homes,
time-shares will all become part of your offer and to add insult to injury, the payments for those assets will
probably not be allowed in the future income calculation.
If your offer is marginal, meaning that it
has potential but may have problems too, one of the biggest factors that will determine its acceptability is who
is working on your case. There are actually people in the IRS that believe in Offers In Compromises and want to
help people if it can be justified by the OIC guidelines. You will be lucky get one of those persons on your
case.
If your offer does not fit into the
computational guidelines or your finances are simply too complicated and questionable for the IRS to understand, no
one will be able to help you with an offer until your situation changes.
I am just telling it like it is. Do not do
nothing if you feel that you will not qualify for an OIC. As mentioned above there are several alternative that
may work for you. Review the alternatives on the next page with a tax professional to see if one may be the
better solution.
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