More on IRS Offers in Compromise
IRS offers in compromise are a tool your tax defense lawyer can use in attempt to settle or reduce outstanding tax obligation in collections. Generally, the statistics show that officers in compromise are accepted by the IRS less than 50% of the time. Keep in mind that your chances significantly increase with an experienced IRS tax lawyer representing your interests.
Three Main Types of Offers in Compromise:
Doubt as to collectibility, doubt as to actual IRS liability, and exceptional circumstances (used for the elderly or severely infirm). This article will focus on “doubt as to collectibility.”
Doubt as to Collectibility
Arguing that the taxpayer is not collectible is the most common basis for an offer in compromise (OIC). When making a currently non-collectible argument, the IRS is going to want a handle on the taxpayer’s available assets and allowable expenses, which helps determine what kind of 24 month installment plan the taxpayer can afford.
IRS Allowable Expenses Used to Determine Taxpayer’s Ability to Pay
- National IRS Standards for food, housekeeping supplies, clothing, personal care items and other items.
- Medical Expense Standards for out of pockets medical services, prescriptions and medical supplies.
- Local Housing and Utility Standards for Florida
(divided up by county)
- Local Transportation Standards
- Necessary to produce income or health/welfare of the family.
- E.g. IRS Form 2106. If client is taking unreimbursed business expenses as an employee…
- E.g. health insurance premiums expenses, term life insurance policy premiums.
- Can argue the standards are inadequate with the IRS. For example, in metropolitan areas such as Miami and Ft. Lauderdale, note the statutory requirements that IRS examiners look at particular circumstances that may make national standards inadequate.
IRS Fresh Start Initiative
In 2012, the IRS launched an expanded and revised fresh-start initiative which makes it easier for taxpayers to obtain an offer in compromise by:
- Taxpayers with annual incomes of up to $100,000 can now participate in the “streamlined” OIC program.
- Taxpayers with a tax liability of less than $50,000 can participate in the streamlined program. If >50,000, law requires IRS lawyers to be involved, so not part of the streamlined OIC program.
Revising Calculation of Future Income
If OIC is to be paid in 5 or fewer payments, use 12 as multiplier.
If OIC is to be paid in 6 or more, use 24 as multiplier.
Expands Allowable Expense Categories
- Student loans
- Credit card payments
- Car payments beyond actual payoff date
- Additional $200/mo for cars 6 years or older or a newer car >75,000 miles (take picture of odometer reading)
See IRC Sec 7122(c)(2)(B) which says that IRS can deviate from schedules to the “extent such use would result in taxpayer not having adequate means to provide for basic living expenses.”
Eases how vehicles are valuated
Eases how business assets are valuated
Reduction in dissipated asset theories
Reduction in multiplier used to determine the future income component of Reasonable Collection Potential (RCP).
Lump Sum vs. Periodic Payment Offer in Compromise
Lump sum offers requires the OIC be accompanied by a payment of 20% of the offer in compromise, with remaining payments made in 5 or fewer installments. A few benefits, but major drawback of - the IRS can keep the 20% AND reject the offer in compromise!
Periodic Payment Offer: > 5 payments, only requires the first proposed installment and additional installments paid while the IRS is evaluating the OIC. More likely to make a periodic payment offer with a lump sum balloon payment at the tail end of the installment period (in 24 months). If IRS rejects the OIC, client loses much less than 20%.
Also, taxpayer can specify where the IRS is to apply the payments that are being made. Since Income taxes owed that are over 3 years old can be discharged in bankruptcy, make sure to designate more recent IRS debts. See IRS Form 656-PPV to designate where to apply the payment being submitted to the IRS.
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