Yesterday, the IRS rolled out a shiny, brand new version of Form 656-B, the Offer in Compromise application booklet. After years of complaints from every corner of the tax world, including tax professionals, taxpayer advocacy groups, the government’s own Taxpayer Advocate panel, and even members of Congress, the IRS has finally fixed the worst problem that has ever existed with the Offer in Compromise program.
Under the system as it has existed for nearly 15 years, the IRS expected you to include in your offer amount the equivalent of your next 4 or 5 years worth of disposable income. In other words, the IRS would look at your current income, deduct your allowable household expenses, and then multiply that number by either 48 or 60…and then expect you to come up with that amount of money (plus the value of your assets) within the next few months, which obviously isn’t practical and defeats the very purpose of the OIC program.
Here’s an example: If you make $4,000 per month, and the IRS “allows” you credit for $3,500 in monthly expenses, then you have $500 per month left over. If you agree to pay your Offer amount in 5 months or less, they multiply that $500 times 48 months, which is $24,000. If you also happen to have $20,000 of equity between a car and your house, your minimum offer amount suddenly becomes $44,000, or almost an entire year’s salary…and they expect you to come up with that amount in 5 months. And if you owe the IRS less than this amount, then you’re not even eligible for the program.
In other words, the Offer program was really only an option for people that owed hundreds of thousands, if not millions, of dollars, and could come up with that kind of cash to make a lump sum payment, OR was only good for people that were absolutely destitute, with absolutely no assets and so little income that they couldn’t even realistically put a roof over their head.
Well, the IRS finally wised up after years of effort by tax consultants such as myself, advocacy groups, and the Taxpayer Advocate. Under the new rules announced yesterday, the IRS has dropped the “multiply by 48 or 60″ rule and made it a “multiply by 12 or 24 rule”. If you are paying your offer amount in full within 5 months, this means that your minimum offer amount you must send the IRS just dropped by 80%. Thank you, IRS, it’s about damn time!
If you would like professional assistance in preparing your Offer in Compromise application, please get in touch with me and consider my Offer in Compromise Application Service, which will save you thousands of dollars over traditional tax resolution options.
To furthering tax sanity,
Jassen Bowsman, EA
Expecting a tax refund this year after you filed your tax return last month? You did file your tax return last month, right? A couple quick things about that.
First, if you have filed an IRS Offer in Compromise (OIC) and it is pending approval, or it has been accepted, you MUST file your tax returns on time and paid in full for a period of 5 years. If you fail to do this, your Offer in Compromise will be denied or, if already approved, REVOKED, and your full tax liability reinstated.
Second, if you filed your tax return and are waiting for that refund check, you’re going to be waiting for a very long time. One of the conditions of filing an Offer in Compromise is that the IRS will intercept (i.e., take) your tax refunds on any tax returns you file. They will do this through December 31st of the year in which your Offer in Compromise is ACCEPTED. Since it takes usually 6+ months for an Offer in Compromise to work it’s way through the complete bureaucracy of the IRS and negotiate it’s final acceptance, you really don’t want your Offer in Compromise to span multiple years.
If you are thinking about filing an Offer in Compromise anytime soon, do it NOW. Then, try to get it DONE before the end of this year. That way, you will get to keep any tax refund you might be due to get when you file your tax return next year.
If you need assistance with your Offer in Compromise, check out our Offer in Compromise Application Service, which offers preparation of your OIC application and required financial forms for a low flat rate as an alternative to traditional full service tax representation, which will typically cost you several thousand dollars for an Offer in Compromise application.
Earlier this week, a reader inquired about whether or not he was required to include his spouse’s income when filing his Offer in Compromise. The reason it was in question is because they maintain completely separate financial lives. They file separate tax returns, have separate bank accounts, and don’t even title anything jointly.
Before you question why somebody would do something like that, there are actually numerous reasons for doing so, especially in regards to various aspects of state law. There are also business and asset protection reasons for keeping things separate. For example, if one spouse owns a business or is involved in a profession or activity with a high degree of litigation, then keeping different financial houses can be a good idea.
Here’s the answer to the question: Believe it or not, even if only one person owes the tax liability, the income (and allowable expenses) of everybody in a household must be included in an Offer in Compromise amount. This applies to everybody living in the home — even people just renting a room from you.
Now of course, we work to get the non-responsible party’s income and expenses taken off the reporting requirements, and I’ve never failed in achieving this objective. Under the tax code, the only person responsible for an IRS tax debt is the person against whom it is assessed, and nobody else.
If you need help with your Offer in Compromise, give me a call – (877) 632-5083.
By now, everybody with a tax bill has heard the “pennies on the dollar” promises on radio and TV. Before handing over thousands of dollars to some Slick Rick salesman over the phone, here are some things you need to know about the Offer in Compromise program.
First and foremost: You probably don’t qualify. What’s that? How can I say that without even knowing you or your situation?Because the IRS statistics show that most people that apply don’t qualify, that’s why. In 2009, the IRS outright rejected 79% of all Offers in Compromise that were submitted. There is no way of knowing, but I do wonder how many of those 79% were submitted by fly by night tax resolution firms promising the moon to their clients just so they could get their money.
Secondly, the Attorney Generals of several states, the Federal Trade Commission, and multiple class action lawsuits have been won over the common sales practice of promising you that moon, and not being able to deliver. More often than not, clients in those situations are sold an Offer program at several thousands of dollars, and are then converted to an Installment Agreement (monthly payment plan to the IRS) with no refund of the price difference. This has been going on for years, and companies are being sued and shut down left and right these days for this and other egregious sales practices that are designed to do nothing but part you from your money.
So, there are probably tens of thousands of other OIC settlements sold by these companies every year that are never actually filed, so they don’t even go into that number that the IRS tracks.
If somebody is trying to tell you that you qualify for an Offer in Compromise without doing a thorough analysis of your financial situation, RUN! They will often say that you can settle your debt for some fraction of what you owe. That fraction is a totally made up number! The formula the IRS uses to determine your required Offer amount has NOTHING to do with how much you owe — it’s entirely based on what you own and what you earn.
To determine whether you even qualify for an Offer in Compromise, you need to examine the value of your assets, including your retirement accounts, cash, equity in your home, your vehicles, the value of business equipment, etc. If all that stuff is worth more than what you owe the IRS, then you are most likely ineligible for an Offer in Compromise.
Also, take a look at your income and expenses. The IRS doesn’t allow all expenses in this calculation, so you have to do the math based on the IRS National Standards. Your income minus your allowable expenses is then multipled by a number of months, usually 48 or 60, and THAT amount is added to your assets. Again, if that number exceeds what you owe the IRS, you are not eligible for participation in the IRS Offer in Compromise program.
Carefully consider all of these factors before giving anybody money to file an Offer in Compromise for you. There *ARE* reputable companies out there, but do your due diligence before spending that kind of money for help resolving your IRS tax debt.