OIC – Doubt As To Collectability

OIC – Doubt As To Collectability

There are three types of Offers in Compromise:

  • Doubt as to Collectability – Does the taxpayer actually have the income and assets to pay back all the taxes owed?
  • Doubt as to Liability – Does the taxpayer really owe all that the IRS is looking to collect? Is there a dispute here?
  • Effective Tax Administration – While the IRS has every right to collect the tax debt in full, it may create an undue hardship to the taxpayer given special circumstances such as age or health.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By the Book Taxes also helps clients resolve their tax debts by preparing and filing Installment Payment Agreements, Offers-in-Compromise, Currently Not Collectible and Innocent or Injured Spouse applications.

By definition, an Offer in Compromise  is appropriate when the IRS is willing to settle a taxpayer’s debts for less than the full amount owed.

Doubt as to collectability arises when the taxpayer does not dispute the amount of tax owed but cannot pay the tax in full during the ten year statutory period the IRS has to collect the debt, usually ten (10) years after the tax return is filed.

The taxpayer must submit a personal financial statement called a Collection Information Statement, Form 433-A, listing monthly income, living expenses, assets and other debts along with three (3) months of documents like bank statements and utility bills to substantiate the expenses.

The IRS has a formula called RCP or reasonable collection potential which uses the taxpayer’s financial information to determine how much they can pay and what the IRS will accept to settle.

For a more detailed explanation of RCP, read this blog, https://activerain.com/blogsview/5329707/norwalk–ct–the-secret-sauce-of-tax-resolution—-rcp- or watch this YouTube video, https://www.youtube.com/watch?v=9tdctyR7hYM

If you have years of unfiled tax returns or owe the back taxes, please call me. I can help.

First Time Abatement (FTA)

First Time Abatement (FTA)

The IRS has a program where you may qualify to have penalties for late filing of tax returns, late payment of taxes or late deposit of payroll taxes (if you have a business and employees) “abated” or removed and either applied against other tax years, the current tax year or even refunded to you.

The program is called “First Time Abatement” or “FTA” and it covers tax years 2001 to the present.

My firm, By The Book Taxes, located in Norwalk, CT., specializes in income tax preparation and tax resolution services.

Here’s how FTA works:

  • Have a tax professional pull your tax history for years 1998-2018
  • Look for a tax year that had significant late filing or late payment penalties
  • If the three (3) tax years prior to the penalty year are “clean” (no penalties), the IRS will “abate” (remove) the tax penalties for that year.
  • You can then use the abated taxes to pay down balances for other tax years, pay estimated taxes for the current tax year or have them refunded to you.

If you think you might qualify for “first time abatement”, please call or email me. I charge a contingency fee based upon how much I can recover for you but there is no cost to you if I do the research and you don’t qualify.

Offers in Compromise (OIC)

Offers in Compromise (OIC)

The Offer-in-Compromise program is the least understood but most widely publicized tax resolution option available. If you are a TV watcher, you will see the commercials touting them every night.

Over the next several weeks, I am going to write about this topic in detail.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By the Book Taxes also helps clients resolve their tax debts by preparing and filing Installment Payment Agreements, Offer(s)-in-Compromise, Currently Not Collectible and Innocent/Injured Spouse applications.

By definition, an Offer-in-Compromise is when the IRS is willing to accept less than full payment to settle a taxpayer’s tax debts.

There are two types of Offer(s) in Compromise:

  • Doubt as to Collectability – Does the taxpayer actually have the income and assets to pay back all the taxes owed?
  • Doubt as to Liability – Does the taxpayer really owe all that the IRS is looking to collect? Is there a dispute here?

In order to be a candidate for an Offer-in-Compromise, a taxpayer must be in compliance. The IRS defines compliance as having filed the last six (6) years of tax returns, having enough tax withheld from your W-2 income to satisfy your tax liability, or, if you are self-employed, being current on your quarterly estimated tax payments.

If you are in compliance, you may choose to file an Offer-in-Compromise requesting one of the two available payment scenarios:

  • Lump Sum Offer – 20% down payment of offer amount plus filing fee upon filing offer and full payment of accepted offer within five (5) months of acceptance date.
  • Short Term Deferred Offer – Payment of filing fee upon offer plus monthly payments while offer is being reviewed. Payment in full required between six (6) months but no later than twenty-four (24) months after acceptance. Monthly payments based upon offer amount paid in twenty-four monthly installments.

There will be much more detail on this program coming in the next several weeks.

If you have years of unfiled tax returns or owe the back taxes, please call me. I can help.

Calculation Of Future Income

Calculation Of Future Income

This blog is the third in a series on how the IRS determines how much (and whether) a taxpayer can repay their tax debts.

The calculation is based upon a concept called “Reasonable Collection Potential”, or “RCP” which looks at a taxpayer’s assets, future income and allowable living expenses in order to determine this. Over the past two weeks I went into detail on the asset and living expense side of the calculation. This week I am going to speak about the taxpayer’s “Future Income”.

My firm, By The Book Taxes, located in Norwalk, CT specializes in income tax preparation for individuals, families and self-employed people. By the Book Taxes also helps clients resolve their tax debts by preparing and filing Installment Payment Agreements, Offer(s)-in-Compromise, Currently Not Collectible and Innocent/Injured Spouse applications.

The most important thing to realize about the “Future Income” calculation is that it is not just a calculation of your net take home pay each month, but rather a cash flow analysis to see how much cash from all sources you receive on a monthly basis.

 
The types of items the IRS look for include*

  • W-2 wages
  • Net business income (from self-employment)
  • Net rental income (investment rental property)
  • Social Security
  • Pension and Retirement (IRA/401k)
  • Investment income (interest, dividends and capital gains)
  • Alimony
  • Child Support

Once the IRS has determined the “gross” amount of cash coming into the household, it then determines, based upon the “allowable living expense” calculation, the amount of funds that are leftover each month and available to pay past due tax balances.

Before being considered a candidate for an Offer-in-Compromise, it must be determined if the taxpayer has enough “net equity in assets” and “future income” to repay the tax debt in full before the statutory collection date expires (ten years from assessment).

Take the monthly net “future income” and multiply it by the number of months remaining on the collection statute. Add that to the “net equity in assets”. If the total is greater than the tax debt then the taxpayer can repay in full and should get on an Installment Payment Agreement with the IRS.

If they can’t repay in full they should consider filing an Offer-in-Compromise where their offer number equals their “net equity in assets” plus 12 months of net “future income”.

If you have years of unfiled tax returns or need help getting a tax debt resolved, please call or email me. I can help.

*The Accountant’s Guide to Resolving Tax Debts by Eric L. Green, page 23

Net Equity in Assets

Net Equity in Assets

Over the last few weeks I’ve given an overview of how the IRS determines how much a taxpayer can afford to pay and how much they (the IRS) will accept to resolve a taxpayer’s outstanding tax liabilities.

Last week’s article, linked here, discusses how the IRS determines what the taxpayer’s “allowable” living expenses will be for this calculation.

My firm, By The Book Taxes, specializes in preparing income tax returns for individuals, married couples and self-employed people. I also help taxpayers resolve their tax problems.

The calculation to determine what a taxpayer can repay and what the IRS will accept is based upon living expenses, assets and income.

The calculation for assets is called “Net Equity in Assets”. Take the value of assets such as your home (if you own it), your car and investment and retirement accounts too.

Assume a “quick sale value” of 80% of the fair market value of each asset. Subtract from that any loans or mortgages you may have against these assets. The result is your “net equity in assets”, or how much you have left after a quick, distressed sale when all loans are paid.

Here is a chart to illustrate the calculation:

           NET EQUITY IN ASSETS    
         
  Fair Mkt. Quick Sale Loan or  
Asset Value Value Mortgage Net Equity
         
Home                425,000          340,000        (295,000)            45,000
Investment Account                175,000          140,000                        –          140,000
Car*                  28,000            22,400              (3,450)            18,950
401k**                475,000          332,500                        –            332,500
Total Assets            1,103,000          834,900        (298,450)          536,450
         
* There is an automatic $3,450 exemption for a vehicle.  
** The QSV of a tax deferred retirement account is 70% assuming the
     taxpayer is under 59 1/2 and has a 10% early withdrawal penalty.

This taxpayer would have $536,450 in net assets that could be sold to pay back his delinquent tax debts. Depending on the level of the tax debt here, I would suggest selling off the investment account and/or withdrawing the 401k, making a large payment to the IRS and then getting on a manageable installment payment agreement.

If you have years of unfiled tax returns, owe a significant (to you) amount of money to the IRS and need someone to help you resolve your tax debts, please call me. I can help.

What Are “Allowable Living Expenses” to the IRS?

What Are “Allowable Living Expenses” to the IRS?

In last week’s blog, “The Secret Sauce to Tax Resolution – RCP” linked here, https://activerain.com/blogsview/5329707/norwalk–ct–the-secret-sauce-of-tax-resolution—-rcp- I gave an overview of how the IRS determines the dollar amount of delinquent taxes that a taxpayer can repay.

 

Over the next several weeks I will go further into detail on the mechanics of this process.

This week I am going to write about what the IRS considers to be a taxpayer’s “allowable expenses” in making this determination.

 

My firm, By The Book Taxes, located in Norwalk, CT., specializes in income tax preparation and tax resolution services.

 

The IRS uses statistics on cost of living expenses gathered by the Department of Labor.

These costs can vary greatly depending upon which region of the country you live in and whether you are in an urban or rural area. The chart below illustrates the types of living expenses that the IRS considers and whether they apply the taxpayer’s actual expenses, a local standard or a national standard in determining how much in monthly payments a taxpayer can afford to repay. This chart is from Eric L. Green’s book entitled, “The Accountant’s Guide to Resolving Tax Debts”, pages 24 and 25.

 

Expense Actual Or Allowable
   
Food/Clothing/Misc National Standard
Housing & Utilities Lesser of Actual or Local Standard
Automobile Ownership Lesser of Actual or National Standard
Automobile Operating Local Standard
Public Transportation National Standard
Health Insurance Actual
Out of Pocket Health Care Costs Higher of Actual Or National Standard
Court Ordered Payments Actual
Child/dependent care Actual (must be necessary)
Life Insurance Actual (must be reasonable)
Current Year Taxes Actual FIT/SIT/FICA/SE/Local
Secured Debts Actual
Delinquent State Taxes % of State vs. Federal Debt

If you have years of unfiled tax returns or have tax debts that need to be resolved, please call me, I can help.