Unlocking the Secrets of an Offer in Compromise: A Comprehensive Guide - Chapter 1

 

This is the first in a series of posts I’ll have on an IRS Offer in Compromise. Through this series I expect answer all of your basic questions, and a few out of the box specific question. If you have a specific question, you would like addressed, please drop me a line or post a comment.  With that introduction lets get started learning about Offers in Compromise and increasing your chance of qualifying for an OIC.

 

An Offer in Compromise (OIC) is a tax resolution option offered by the IRS that allows taxpayers to settle their tax debt for less than the full amount owed. The purpose of an OIC is to provide a way for taxpayers who are struggling financially to resolve their tax debt in a manner that is fair to both the taxpayer and the government. The IRS will consider an OIC when it is unlikely that the tax debt can be paid in full and the taxpayer's assets and income are not sufficient to fully pay the debt. An OIC can also be considered when the taxpayer has a doubt as to the liability for the tax debt or the collectability of the debt. The goal of the OIC program is to provide a win-win solution for the taxpayer and the IRS, where the taxpayer can resolve their tax debt without causing undue financial hardship, and the IRS can collect as much of the debt as possible.

 

THE OFFER IN COMPROMISE PROCESS

An Offer in Compromise (OIC) is a program offered by the Internal Revenue Service (IRS) that allows taxpayers to settle their tax debt for less than the full amount owed. The process involves submitting a proposal to the IRS that includes a detailed explanation of the taxpayer's financial situation and a proposed payment plan. The IRS will then review the proposal and determine if it is in the best interest of the government to accept the offer. Factors considered include the taxpayer's ability to pay, the likelihood of collecting the full amount owed, and the taxpayer's compliance history. If the offer is accepted, the taxpayer must comply with the terms of the agreement and make all payments on time in order to avoid defaulting on the OIC.

 

The Pros and Cons of an OIC

Pros of an Offer in Compromise:

  • It can significantly reduce the amount of tax debt owed to the IRS.
  • It can provide relief from wage garnishments, liens, and levies.
  • It can help taxpayers get out of default on their tax debt.
  • It can prevent bankruptcy in some cases.

 Cons of an Offer in Compromise:

  •  It can be a complex and time-consuming process.
  • Not all taxpayers qualify for an OIC.
  • The IRS may reject the offer if they deem it not reasonable or acceptable.
  • If the offer is accepted, the taxpayer must comply with the terms of the agreement, including paying a non-refundable application fee, and making all payments on time.
  • Once the offer is accepted, the taxpayer cannot apply for another offer in compromise for several years.
  • The acceptance of an OIC may have credit score implications.

 Two other important considerations are:

The Collection Statute Expiration Date - The Collection Statute Expiration Date (CSED) is a time limit set by the IRS for collecting taxes owed. It is the date by which the IRS must take action to collect the debt, such as filing a lien or levy. The CSED is typically 10 years from the date the tax was assessed, but it can be extended in certain circumstances.

 When considering an Offer in Compromise (OIC), the IRS will take the CSED into account when determining the taxpayer's ability to pay the debt. If the CSED is approaching, the IRS may be more inclined to accept an offer, as they may not be able to collect the full amount of the debt before the statute expires.

 However, submitting an OIC will not automatically stop the collection process or the running of the CSED. Once the OIC is accepted, the CSED will be suspended until the offer is either accepted, rejected or withdrawn. And after the OIC is accepted the CSED will be re-start from the date the OIC is fulfilled.

 It's important to note that submitting an OIC does not extend the CSED, and taxpayers should not rely on this as a way to avoid paying their tax debt. It's best to consult with a tax professional to understand the CSED and its implications on the OIC process.

 All refunds will be applied to your debt - If your Offer in Compromise (OIC) is accepted by the Internal Revenue Service (IRS), the refund you would be entitled to from any overpayment of taxes will be applied towards the amount you owe as part of the compromise agreement. This means that if you have an outstanding tax liability and are entitled to a refund, the IRS will apply the refund towards the outstanding debt, rather than issuing a refund check to you.

 The IRS will also typically continue to apply any future refunds you are entitled to towards the outstanding debt until the terms of the OIC are fulfilled. This is known as a "refund offset."

 It's important to note that if you are expecting a refund and the OIC is accepted, you should consult with the tax professional or attorney that helped you with your OIC to understand the impact of the refund offset on your payment plan.

 

IRS Financial Analysis of your OIC

Section 5.15.1 of the Internal Revenue Manual (IRM) describes the IRS Financial Analysis process, which is used by the IRS to evaluate the financial information provided by taxpayers who are seeking an Offer in Compromise (OIC) to settle their tax debt.

The financial analysis process involves a review of the taxpayer's income, expenses, assets, and liabilities to determine their ability to pay the tax debt in full. The IRS uses this information to make a determination of the taxpayer's reasonable collection potential (RCP). The RCP is the amount of money the IRS believes they can collect from the taxpayer over the remaining collection statute period.

 The IRS Financial Analysis process includes the following steps:

  •  Verification of income: The IRS will verify the taxpayer's income and expenses to determine their ability to pay. This may include reviewing tax returns, pay stubs, and other financial documents.
  •  Determination of allowable expenses: The IRS will use IRS National Standards for certain expenses such as housing, food and clothing, transportation, etc. and will determine if any additional expenses are allowed based on the taxpayer's specific circumstances.
  • Evaluation of assets: The IRS will evaluate the taxpayer's assets, such as property, bank accounts, and investments, to determine their equity value and potential for liquidation.
  •  Review of liabilities: The IRS will review the taxpayer's liabilities, including loans and credit card debt, to determine their overall financial situation.
  •  Calculation of RCP: The IRS will use the information gathered in the financial analysis to calculate the taxpayer's RCP. If the taxpayer's RCP is less than the amount of the tax debt, the taxpayer may qualify for an OIC.

 It's important to note that the IRS Financial Analysis process is complex and requires detailed financial information, it's best to consult with a tax professional or attorney to help navigate the OIC process.

 How the IRS Calculates the Net Realizable Equity in Assets

The Internal Revenue Service (IRS) uses the concept of Net Realizable Equity (NRE) to determine the potential value of a taxpayer's assets when evaluating an Offer in Compromise (OIC) application. The NRE is used to calculate the taxpayer's reasonable collection potential (RCP), which is the amount the IRS believes they can collect from the taxpayer over the remaining collection statute period.

 The IRS calculates NRE by subtracting the total liabilities on an asset from the fair market value of the asset. The fair market value is the price at which an asset would be expected to sell on the open market. The IRS will typically use the fair market value determined by an independent appraiser, or the value listed in the local property records.

 For example, if a taxpayer owns a property with a fair market value of $200,000 and has a mortgage of $150,000, the NRE of the property would be $50,000 ($200,000 - $150,000). The IRS would consider this $50,000 as an available asset to pay the outstanding taxes.

 The IRS will also consider the cost to sell an asset, such as real estate commission and transfer taxes, when calculating NRE. These costs are subtracted from the fair market value to determine the NRE.

 It's worth noting that the IRS can also consider other factors such as the difficulty of liquidating an asset, such as a business, and the time frame in which the asset can be sold.

 It's important to note that the IRS Financial Analysis process is complex and requires detailed financial information, it's best to consult with a tax professional or attorney to help navigate the OIC process and understand the calculation of the NRE in the assets.

 

THE IRS ASSET/EQUITY TABLE

The Asset/Equity table is a tool used by the Internal Revenue Service (IRS) in evaluating an Offer in Compromise (OIC) application. The table lists the maximum amount of equity the IRS will allow a taxpayer to retain in certain types of assets while still qualifying for an OIC. The table is used to calculate the taxpayer's net realizable equity (NRE), which is the value of an asset that can be used to pay the outstanding tax debt.

 The Asset/Equity table is found in the Internal Revenue Manual (IRM) 5.15.1.11, which provides the guidelines for evaluating OICs. The table lists the maximum equity the IRS will allow for certain types of assets, such as primary residence, automobiles, personal property, and cash and bank accounts.

 For example, the table may state that a taxpayer can retain a maximum of $5,000 in equity for a primary residence. If the fair market value of the taxpayer's primary residence is $200,000 and they have a mortgage of $195,000, the NRE of the property would be $5,000 ($200,000 - $195,000). The IRS would consider this $5,000 as an available asset to pay the outstanding taxes.

 It's important to note that the Asset/Equity table is subject to change over time, and may be adjusted to reflect changes in the economy, housing market, and other factors. Additionally, the IRS may make exceptions or adjustments to the table on a case-by-case basis depending on the specific circumstances of the taxpayer.

It's worth noting that the Asset/Equity table is just one aspect of the IRS's financial analysis when evaluating an OIC, the IRS will also consider income, expenses, and other liabilities when determining the reasonable collection potential (RCP) and if the OIC will be accepted. It's best to consult with a tax professional or attorney to help navigate the OIC process and understand the implications of the Asset/Equity table on your OIC submission.

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In my next post we'll take a look at the objectives of an OIC, the requirements, and the standards the IRS uses to evaluate your OIC.

Please click here for links to the other chapters in this series. 



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