IRS Offer in Compromise Planning | IRS Legal Defense

IRS Offer in Compromise Planning

Your IRS tax lawyer will look at what the IRS considers allowable expenses to see what you don’t have, but would benefit from, before submitting an IRS offer in compromise.  For example, a taxpayer is allowed to act as a prudent person would. A prudent person might certainly take a look at purchasing:

  • Health insurance (could they benefit from a better plan?)
  • Life insurance (even if planning on giving up the coverage after the OIC is accepted by the IRS)
  • Disability insurance
  • Are their car payments matching or under what the IRS allows (would the taxpayer benefit from, and can they afford, a better car?)....the amount you have to offer the IRS is reduced by the allowable car cost.

Your IRS tax defense attorney may want to discuss the benefits of making “structured payments” where the offer in compromise consists of many small payments, following by one large balloon payment at the end of the offer-in-compromise term (up to two years). A structured offer is especially valuable if you think the OIC may be rejected (because the IRS keeps the money, and better for them to keep small payments as opposed to 20% down plus equal monthly payments).

The structured payments is also, of course, of great value to taxpayers who just don’t have 20% of their tax liability to put down.

Some Other IRS tax defense tools

Switch from Short-Term Deferred OIC to Lump Sum OIC

If the taxpayer doesn’t want to risk losing 20% (or needs a bit more time to get it together), the IRS defense lawyer may recommend initially submitting an IRS offer in compromise to be paid off within 24 months (short-term deferred). As the IRS offer examiner is considering the offer, small payments are being made. Once the IRS indicates that they are willing to accept the offer, indicate a desire to amend Form 656 from “short term deferred,” with structured payments, to a “lump sum” offer in compromise to be paid off within 5 months. This allows the taxpayer to cut the income component in half (by reducing the income multiplier from 24 to 12) without having to come up with 20% right away.

Of course, if there is a limited or non-existant income component, then this strategy wont really make sense because the multiplier reduction isn’t going to improve the taxpayer’s obligation. In that case, stick with the short-term deferred offer in compromise.

Moving Assets Around

An example might be paying off (or lowering) debts such as money owed on a car or mortgage. Another example is taking $9,000 out of the bank and using it to purchase a new needed roof for the home.

Looking at allowable expenses is a very important part of OIC planning.

Non-Liable / Innocent Spouse

If married couple files separately, and the tax burden is only owed by one spouse, filing an innocent spouse IRS case with the IRS removes the innocent spouse’s income from the calculation (and equity if the innocent spouse has separately titled assets). This would, hopefully, lead to a smaller offer amount required for an offer in compromise to be approved by the IRS.

Members of the Household

Sometimes one’s family size is different on the tax return than in reality. It is not uncommon for the taxpayer to refrain from listing a parent (or other elderly relative) that lives with them as a dependant. If the elderly parent has a small social security check that mostly goes to their medical costs and the taxpayer winds up paying for their portion of her housing, clothing, food, etc.. Even though the elderly parent may not be able to be claimed as a dependant, they can still be claimed as a “member of the household” in an offer and compromise. Similarly, this concept may apply to non-dependant children living in the household.

The extra member of the household will provide additional allowable expenses, due to the larger family size, that can make a significant difference in the offer amount. However, if the extra household member brings in an income, they will have to allocate national standards for food/clothing and local housing/utility standards. The non-dependent’s costs, even if paid for by the taxpayer looking to make an offer in compromise, will be disallowed from being considered in the OIC calculation.

Collateral Agreements - as part of an Offer in Compromise

Typically, a collateral agreement makes sense when a taxpayer’s income was historically high, but decreased significantly in recent years or the IRS has reason to believe that a taxpayer’s income is on target to rise. The collateral agreement is used to “sweeten” the deal for the IRS making it more likely that an offer in compromise will be accepted.

There are four collateral agreement forms:

IRS Form 2261 - Collateral Agreement for Future Income (for an individual). Offering the IRS a percentage of the taxpayer’s income should it increase by some set amount for a set period of time (i.e. I only earn $35,000 now. If I ever earn more than $50,000, I will pay the IRS 15% of that excess income. If I ever earn more than $60,000, I will pay the IRS 20% of THAT increased amount for the next three years.

IRS Form 2261-A - Collateral Agreement for future Income (for a business entity)

IRS Form 2261-B - Collateral Agreement Adjusted for Specific Assets - perhaps reducing the basis on an asset that may be sold in the future (resulting in a larger amount of taxes owed up on that future sale).

IRS Form 2261-C - waiver of long-term capital loss carry forwards or unused investment credits.

https://www.irs.gov/irm/part5/irm_05-008-006

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