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By Michael S. Anderson of Anderson Tax Law logo for Arizona tax attorney Michael S. Anderson P.C.
  • Income Producing Assets in an IRS Offer in Compromise

    imagesIf you own a business and that business has value, many people would assume that it should be included as an asset in calculating the amount of settlement.  As a result, many offers are calculated much higher than they should be.

    Income producing assets in an IRS Offer in Compromise shouldn’t always be fully included in the calculation of “reasonable collection potential”.

    When an Offer in Compromise is submitted to the IRS and that taxpayer owns business assets that produce income, it’s correct to adjust the income or the expense calculation to account for any loss of income if the asset were liquidated or used as collateral to secure a loan for purposes of funding the offer.

    This analysis may even include a rental property.

    The Internal Revenue Code defines rental property as a real estate trade or business.  Rental property is important to the production of income where it is actually being rented.  If the IRS were to treat the equity in the rental property as an asset for Offer in Compromise calculation purposes, it would then need to reduce the income from that rental property as well.

    The reason so many people get this calculation incorrect is because the IRS forms 433A and 656 don’t specifically ask if any business assets are essential to the production of income.  Most offer in compromise “filers” simply add both the asset value and the income stream from the asset to the disclosures in 433A and to the calculation in the 656 form as a result.

    When they do this, the IRS gladly accepts.  It won’t catch the mistake and fix it.  It definitely won’t make the argument for the taxpayer either.

    If you own rental property or a business and have significant tax debt, keep in mind that the Offer in Compromise must take the above into account. The documents should contain and the argument must be made that either the equity should be excluded or the stream of income should be excluded from the income producing business asset when calculating a settlement amount in an Offer in Compromise.