I calculate the clock.
Why do I care so much about this bit of information and write about it all the time? I mean come – on….blah blah blah – clocks are boring.
If you read this blog, I understand what you are feeling. Lots of talk about clocks and time. REALLY BOOORING.
BUT…If you have a tax debt that has been lurking around awhile – these articles about the CSED should be interesting and for some of you, actually exciting…old clocks and all.
Let me explain by category…once again.
CSED and Offer in Compromise
An IRS offer in compromise is as it sounds. It’s a formal process that allows you to try to make a deal with the IRS and settle the tax debt. There are two primary reasons why the CSED makes a difference in relation to the IRS offer in compromise.
Number 1 – The CSED Determines Whether You Will Qualify
Can you read that aloud again so that all can hear.
I mean really…what’s more important than “whether you will qualify”.
So…it goes like this; The IRS gets to determine how much money you need each month to survive. It starts with these things called IRS Standards or IRS National Standards and works it’s way up from there, deciding whether to add to the budget with your claims about child support, and tuition and 401k loans and credit card payments etc. etc.
It then looks at your income. What it has been, what it is, what it will be, and makes a decision about what it thinks you income will be.
It then subtracts one from the other and comes up with a number.
It takes that number and MULTIPLIES IT BY THE CSED. Example: Number = $500.00 and CSED = 100. or $50000.00
The IRS then calculates your asset value. Example: $50000.00.
The two are added and called the “reasonable collection potential” or RCP. The RCP is compared to the debt amount. Example: Debt Amount – $75000.00
RCP – $100,000.00
DEBT – $75,000.00
The offer in Compromise fails because the RCP is greater than the Debt. BUT what if the CSED were only 20 months. Would the RCP have been less than the debt? Yes.
Number 2 – The CSED Tells you whether you should bother with the OIC
Once you understand how offers in compromise are calculated and what the CSED is and WHY IT’S SO IMPORTANT…you begin to see that sometimes you can just be wasting your time. Pun intended.
Example – Waiting out the clock
Mr. Wonderful owes the IRS a big bucket of money. He owns a home that has $150,000.00 in “quick-sale” equity, but he can’t borrow against it because he has bad credit, primarily due to the IRS’ lien but also because he buys too many suits and steak dinners on credit.
The IRS wants to get paid, but realizes he can’t borrow against the home. So, it agrees to put him in a partial pay payment plan, or a plan that doesn’t pay the entire debt off before the CSED is over. It does this because it agrees he can’t afford to pay more than that every month.
There are 4 years left on the CSED and he is paying the IRS $100.00 per month. If everything stays the same, he will have paid the IRS $4800.00 over the next 4 years and his home will have increased in value. IF he files an offer in compromise, the offer amount will have to include the quick-sale value of his home and the CSED will stop running while he is in the offer.
When he comes out the other end and is unsuccessful…the CSED will be waiting where it was left. Mr. Wonderful chooses to stay in the payment plan. Not Dumb.
CSED and BANKRUPTCY
Much of what was written above applies here as well. I won’t simply repeat it…thank goodness right?
But…be aware that the CSED matters in other ways as well when it comes to bankruptcy. The most important way it matters is in it’s calculation. No…not in calculating the bankruptcy, but in calculating the CSED. Why? Because the CSED stops running when you are in bankruptcy. Sometimes over a 10 year period people file for bankruptcy more than once.
People call me and say…”hey Mike, I have this really old income tax debt and the IRS just levied my account. I read about this CSED thing and I don’t understand why they are still collecting on me”. My response…”have you ever filed for bankruptcy?”
The bankruptcy is often the problem. What if a chapter 7 bankruptcy was open for 2 years? Understanding how that affects your CSED is important.
CSED and PAYMENT PLANS
There are several areas where the CSED and the calculation of an IRS payment plan intersect, but the most common way is when a person owes the IRS less than $50,000.00 and wants to avoid filing a 433 financial statement. IF the CSED has 72 months or more left on it, the IRS will usually agree to simply divide the debt by 72 months and put that person into a “streamlined” payment and IF no lien notices have yet been filed it won’t file them.
But what if the CSED only has 40 months remaining. Will the IRS still allow the payment over 72 months? No. It should allow it over 40 months.
What if the debt is $50,000.00 even. Over 40 months that’s $1250.00 per month. Over 72 months – 695.00. Which would you prefer?
In a strange way, higher income earners with less than $50,000.00 in tax debt want the CSED to be longer…usually.
We hinted at another example above. The Partial Pay scenario and Mr. Wonderful.
To re-state it a bit.
In certain circumstances – the CSED can really hurt. Even if the payment plan you negotiate with the IRS is “small”. If the CSED is large, you run a much greater risk of problems. TIME isn’t your friend.
Example – Partial Pay vs. Chapter 7 Bankruptcy
Ms. Nositall owes the IRS $30,000.00 as a result of some unpaid taxes on a cashed out retirement plan. She has long since spent the money and has taken a job making $25.00 per hour. She isn’t a good offer candidate based on the RCP, but she has been able to convince the IRS to put her into a monthly payment of $395.00 per month. It’ painful, but better than a wage garnishment. THE PROBLEM is that she has 6 years remaining on the CSED and she plans on making more money at this job in the coming year and beyond. She is also struggling to pay some credit card debt. She speaks to her attorney and learns that when the IRS sees the higher income (new w-2 or tax return) it will want to re-negotiate the payment plan and bump it up quite a bit. She qualifies now to file a bankruptcy, and the entire tax debt qualifies to be discharged along with her credit card debt. Her choice: Bankruptcy.
Clocks are important and sometimes interesting. They keep track of time… and if you have a large tax debt, time is of the essence.