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.

Tax Resolution’s Secret Sauce: Reasonable Collection Potential (RCP)

Tax Resolution’s Secret Sauce: Reasonable Collection Potential (RCP)

How does the IRS determine how much of your tax debts you can afford to repay?

Should they insist on full repayment? Settle for less than what you owe them? Leave you alone for a year or two while you overcome a financial hardship like the death of a spouse, loss of employment, serious illness, divorce, etc?

Last week’s article linked here: https://activerain.com/blogsview/5326733/norwalk–ct–resolve-irs-debt-with-an-installment-payment-agreement spoke about Installment Payment Agreements where you can (in most cases) pay back your tax debts in full within the statutory time period allowed to the IRS through monthly payments.

There are also two (2) other resolution options available to you:

  • Currently Not Collectible
  • Offer in Compromise

Currently Not Collectible (CNC) status is granted when the IRS determines that it would create a financial hardship to collect taxes owed from a taxpayer who at the time doesn’t have the income or asset level to support repayment.

An Offer in Compromise is easily the most misunderstood of the tax resolution options available to taxpayers. It is also the subject of those crazy TV commercials claiming to settle taxpayer’s debts for pennies on the dollars.

With an Offer in Compromise, the IRS may accept a settlement that is less than the full amount owed.

The questions remain; how do they calculate this? How much should I offer? Would I be considered “uncollectible” given my current financial situation?

The answer isn’t magic, it is arithmetic. The answer is a concept called Reasonable Collection Potential or RCP which is the sum of two calculations:

  • Net Equity in Assets plus
  • Future Income

Net Equity in Assets

What assets do you have that can be used, sold or withdrawn to pay your tax debts? Cash, real estate, antiques, vehicles, cash value life insurance, retirement accounts and investment accounts are all scrutinized.

Take the quick sale value (80% of fair market value) of the non-cash assets and subtract from that any loans or mortgages against them. You are allowed to keep a vehicle and tools you own since they may be required to generate income.

What you are left with is Net Equity in Assets.

Future Income

 After subtracting your monthly living expenses from your monthly gross income, how much is left over to pay the IRS?

There are some important things to know here. It’s not just based upon your employment income, but rather all sources of income. This is a cash flow analysis, first and foremost.

Another thing to know is that not all expenses are created equal. The IRS uses cost of living standards that are developed by the Department of Labor. For the purposes of this analysis, depending on which expense category is involved, the IRS may accept your actual expense for health insurance, the national standard for public transportation or the local standard for automobile operating expense.

Take your monthly gross income from all sources and subtract your allowable living expenses based upon the standards the IRS uses. Multiply that number by twelve (12) and that’s your future income for the next year.

Add Net Equity in Assets to Future Income and that’s your offer.

If this calculation exceeds your taxes owed, your offer will be rejected. If you have few assets of value to sell and your allowable expenses equal or exceed your gross income, you are a good candidate for Currently Not Collectible.

If you have a tax problem that needs resolution or have years of unfiled tax returns, please call me at 203-434-5626 or email me at mikeo24@bythebooktaxes.net, I can help.

 

 

Installment Payment Agreements

Installment Payment Agreements

In last week’s blog entitled, “Do You Owe the IRS? Here Are Your Resolution Options” attached here.I gave an overview of the three (3) primary options available to taxpayers, Installment Payment Agreements, Currently Not Collectible and Offer in Compromise.

For the next three (3) weeks I am going to take each one of these resolution options and describe them in more detail.

This week I am going to describe Installment Payment Agreements.

There are four (4) types of Installment Payment Agreements:

  • Automatic (taxpayer owes less than $10,000)
  • Streamlined (taxpayer owes less than $100K)*
  • Regular (taxpayer owes more than $100K)*
  • Partial Pay (taxpayer cannot pay the full amount owed)

Automatic Installment Agreement

A taxpayer can go online to irs.gov and complete Form 9465 and submit to the IRS to set up a payment plan if they owe less than $10,000, agree to pay the balance within three (3) years and haven’t owed any tax or had a previous installment agreement in the last five (5) years. There is a $120 fee to set this up which comes out of the first payment. If you set up a direct debit payment from your checking account, the fee is only $52. You can also submit Form 9465 as part of your tax return filing. No personal financial statements required.

Streamlined Installment Agreement

These are similar to the automatic agreements except for larger dollar figures and longer repayment periods. One issue bears a little explaining here which is why I placed the “asterisks” above. There are two (2) areas with the IRS that do “Collections”, Field Offices and Automated Collection Services (ACS). Field Collections only allows Streamlined Installment Agreements up to $50,000 as long as the taxpayer can full pay the balance due within seventy two months (6 years) or within the time that the IRS has legal authority to collect the debt which is ten (10) years from “assessment”, typically when you file your tax return. Automated Collection Services (ACS) offers these agreements for balances up to $100K and payment periods of eighty-four months (7 years). Once again, no personal financial statements required.

 Regular Installment Agreement

These agreements are for when you owe either more than the $50K threshold (Field Collections) or $100K (Automated Collections) and cannot full pay the balances due within the seventy-two month (6 years) or eighty-four month (7 years) timeframes. You must be able to pay the full balance within the ten (10) year statutory period in which the IRS is allowed to collect the debt. You must submit a personal financial statement (Form 433-A or 433-F) showing your monthly income from all sources and your monthly living expenses. In this way the IRS can determine how much is left over each month that can be used to pay down the tax debt.

There is an important point to be made here regarding your monthly living expenses. The IRS employs different standards (local or national) developed by the Department of Labor to determine how much you can claim for each expense category such as housing, transportation, insurance, health care, etc. Depending on the expense category, you may be claiming either your actual expense or the national standard or a local (county or region) standard.

Completing these personal financial statements can be difficult. You need a skilled tax professional to help you with them.

Partial Pay Agreements

These agreements are for when the taxpayer cannot pay the full balance due with the ten (10) year statutory period that the IRS has to collect the debt. Submit the personal financial statement (Form 433-A of 433-F) to the IRS to determine how much can be paid on a monthly basis just like the regular installment agreement. The IRS will revisit these agreements every year or two to see if the taxpayer’s financial situation has improved so that they may increase their monthly payments.

If you have a tax problem that needs resolution or have years of unfiled tax returns, please call me at 203-434-5626 or email me at mikeo24@bythebooktaxes.net, I can help.

Footnotes:

  • Streamlined agreements are only available up to $50K from IRS Field Collections Offices.
  • Streamlined agreements are available up to $100K from IRS Automated Collection Services.
  • Above $50K dealing with Field Collections, it’s a Regular Agreement.
  • Above $100K dealing with ACS, it’s a Regular Agreement.