I have complained in the past about the IRS Offer in Compromise program and with good reason. The vast majority of IRS Offers filed failed at a rate of more than 75% on average nationwide. For most people with serious tax debt the rules just didn’t apply. I saw the program as an IRS method to collect information and little else.
In May of 2012 however, the IRS surprised some people including me. It changed the rules regarding how Offers in Compromise are calculated. These changes will likely result in a higher success rate than before.
The following some important changes that may make a difference in the calculation of the Offer amount and will also likely result in a higher acceptance rate.
In the old days, the formula for determining a taxpayer’s reasonable collection potential looked something like this:
“Excess” Income x 48 + Plus Asset Value = Cash Offer
Now it is:
“Excess” Income x 12 + Plus Asset Value = Cash Offer
This change is big.
Taxpayer with $180,000.00 in tax debt and $5000.00 in net income post tax withholdings.
If the IRS agrees that the reasonable budget needed to live is $4300.00 per month and the value of all non-exempt assets is $5000.00:
The two formulas would look like this:
$700.0 x 48 + $5000.00 = $38,600.00
$700.00 x 12 + $5000.00 = $13,400.00
A difference of $25,200.00.
State Taxing Agency Installment Agreement
In determining the reasonable living expense budget the IRS has agreed to include a percentage of the monthly payment to a State Taxing Agency for delinquent tax debt. We are now including this percentage payment made to the State of Arizona as a budget item as a result.
3 REMAINING PROBLEMS
We find that there are a number of problems that exist in bringing a successful IRS Offer in Compromise to fruition. The 3 most important to understand are these:
The IRS is allowed to decide to a large extent the amount of money that the taxpayer should be living on. It uses a set of standards to determine the amount. See the IRS Standards here.
The problem? The budget used to determine the Offer amount is often not the budget the taxpayer is actually living on. The budget is often higher but is also often lower.
IRS maximum allowable budget: Two Person Household Budget – Phoenix, Az.
Housekeeping Supplies 66.00
Personal Care 55.00
Car Payments 1034.00
Car Upkeep/transport 582.00
Housing and Utilities 1834.00
Out of Pocket Med 120.00
Additional Items IRS will likely accept:
Out of pocket medical above standard of 120.00 per month (assuming 100.00 addl)
Health Insurance Monthly (assuming 450.00)
Term Life Insurance Monthly – reasonable (assuming 100.00)
Arizona State Tax Payment % – back tax debt long term (assuming 250)
Total Estimated Monthly Budget IRS Allows: 5299.00
Assume the following is true:
a. Taxpayer household nets $6500.00 post tax-withholding.
The IRS allowable budget total would be 5299.00 and that would be subtracted from 6500.00.
The difference…1201.00 would than be multiplied by 12 and that number would be added to the taxpayer’s non – exempt asset value. Assuming asset value of 0 the cash offer would be 14412.00
2. Statute of Limitations
Before any offer amount can be calculated, the IRS will look closely at the income and budget and it will multiply the difference between the two by the length of time left in the Statute Period for Collection which is 10 years from the date of assessment.
So assume the following about the taxpayer described above under Budget.
a. The tax debt is from the 08 tax year and it is related to a failed business.
b. The debt was assessed against the taxpayer in 2010 and there are 7.5 years remaining on the 10-year collection period.
c. The tax debt is 80,000.00
If the income and budget difference were 1251.00 per month and that were multiplied by 7.5 years the amount the IRS would believe it could collect before the statute ran would be 112,590.00.
As a result the IRS would never get to the issue of settlement and the Offer would be rejected.
Knowing a few things going into an Offer as a result will be very important:
– Tax debt amount
– Statute Period Remaining
– Highest and lowest possible “excess” income amounts
3. IRS Can Reject for other reasons
Just because you meet the criteria to make a successful offer in compromise from a financial standpoint, your offer won’t necessarily be accepted. The IRS rejects Offers in Compromise for other reasons.
In our office, every attempt is made to qualify a client for the IRS’ Offer in Compromise program. If it does not appear that it will make sense to file one, we fall back on using the IRS payment plan program in combination with the IRS Statute of Limitations Rule and/or bankruptcy to deal with the debt.
We typically don’t take a case unless we believe that with some planning, the client can substantially reduce or eliminate tax debt.
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