Owing the IRS for back taxes can really be life altering. It can change your entire outlook on life and can even affect your relationships, with family, friends and colleagues. There are many tax relief solutions offered by the IRS that did not exist in previous years. These types of tax resolution initiatives can certainly work to a uniquely qualified taxpayer’s advantage.
The most advantageous tax program is called the Offer in Compromise which has seen increasing application acceptance. An Offer in Compromise is accepted when the IRS allows a taxpayer to enter into a settlement with the IRS for less than the tax debt owed. It’s a great deal, but not everyone qualifies. The Offer in Compromise program is not new…it has actually been around for a long time, but its standards are changing to allow for more lenience.
When the IRS receives an Offer in Compromise application from a taxpayer trying to settle a tax debt, it looks at a taxpayer’s ability to pay on a monthly basis and their total equity in assets that can be used to pay off the unpaid tax debt. While the “equity in assets” calculation remains virtually unchanged, the “ability to pay” equation has been overhauled.
Up until early last year, the amount calculated for a taxpayer’s monthly ability to pay was multiplied by 48. Currently, this figure is allowed to be multiplied by 12 for offers paid in 5 or fewer months and 24 for offers paid in six to 24 months. This results in a smaller offer amount to be made and potentially accepted by the IRS. This is a huge change to the Offer in Compromise program and in settling taxpayer tax debt for quite possibly significantly less than is owed.
Let’s look at an example: If a taxpayer has an income of $5,000 a month with IRS “allowable and necessary expenses” of $4,500, the IRS will determine that the ability to pay down the tax debt is $500 per month. Under the old Offer in Compromise rule, the IRS would take the $500 per month and multiply it by 48 or $24,000. This amount would represent a taxpayer’s present ability to pay in order to settle the tax debt through the Offer in Compromise program. This doesn’t even include the equity in assets that a taxpayer must include. Hopefully, he or she has no significant assets or any disposable income making it easier to qualify and come up with an affordable offer amount because let’s face it…$24,000 is hard to come by for many people in these hard economic times.
But, let’s look to the new rule if a taxpayer wants to pay the offer in five or fewer months. Since we are multiplying the monthly disposable income by 12, the taxpayer will have to come up with only $6,000 as the offer amount (12 months x $500) plus the equity in assets the taxpayer owns. This new equation obviously makes it much easier for a taxpayer to somehow raise the money or borrow the money to settle their IRS tax debt.
Many taxpayers looking to settle their tax debt with the Offer in Compromise program think that every monthly expense they incur counts as an “allowable expense.” Not even close. The IRS has strict guidelines as to what expenses are allowed in the calculation of monthly expenses for an Offer in Compromise application. These expenses must be considered “necessary” and are based on a national standard for certain expenses such as food and clothing, and a local standard for expenses such as rent and utilities. The IRS rarely allows expenses beyond the necessary and allowable guidelines.
Also, make sure you know the difference if you are self-employed or have an employer. When self-employed, there may be sporadic income as compared to a taxpayer that has an employer or is W-2 where income is easily predicted. In the case of a self-employed taxpayer, the previous six months of income should be averaged to arrive at the average monthly income.
There are some very important aspects to be aware of when looking into an Offer in Compromise to settle your IRS tax debt. An Offer in Compromise will automatically fail, for example, if there has been a transfer of assets into another’s name for less than market value. The IRS also may refuse an Offer in Compromise if the taxpayer has other assets that can satisfy the unpaid tax debt such as an IRA, pension or whole life insurance policy. Taxpayers all too often overlook these items as something the IRS can attribute to unpaid taxes and can present a huge surprise to a taxpayer when the IRS looks to seize these assets.
Lastly, you need to stay compliant. To benefit from an Offer in Compromise in resolving tax debt, you must file your tax returns on time and paid in full if you owe. This must be done for five years. If you fail to comply, all of the tax debt comes back to haunt you, the offer amount is applied to your tax debt and your agreement is null and void.
The best way to start negotiating tax debt with the IRS is to hire a professional, namely a tax attorney. An IRS tax attorney has the experience and knowledge essential in maneuvering through the complex tax rules and changing Offer in Compromise guidelines to qualify you and push your offer through. It is simply too hard to deal with the IRS on your own. If you need help with tax settlement and are looking to settle IRS taxes consult with San Diego tax attorney Delia Law for a free consultation. The San Diego Tax Attorneys at Delia Law have many years of IRS tax resolution experience and will aggressively represent you before the IRS. Please call for a no-cost tax attorney consultation at (619) 639-3336. We look forward to helping you.
This blog post is not intended as legal advice and should be considered general information only.