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OFFERS IN COMPROMISE: WHEN YOU CAN’T PAY
Offers In Compromise: When You Can’t Pay
By ppappas • February 6, 2009
If there is doubt as to your ability to pay your IRS debt in full within the statute of limitations period the IRS will consider accepting less than the full amount you owe.
The IRS will accept for processing Offers in Compromise in which the amount offered represents the IRS’s reasonable collection potential.
Calculating Reasonable Collection Potential
Reasonable collection potential is calculated using the following algebraic formula:
A + ((B-C)x48) = D
Where:
- A = The equity in the taxpayer’s assets
- B = The taxpayer’s monthly income
- C = The taxpayer’s monthly necessary living expenses
- D = The offer amount
Example:
Eileen Levy is single and owes the IRS $80,000.00 in back taxes, penalties and interest. She owns the following assets and owes the following debts:
- Primary Residence – Fair Market Value $250,000.00**; Mortgage $210,000
- Automobile – Fair Market Value $22,000; debt $24,000
- Jewelry – Fair Market Value $5,000.00; debt zero
** Generally, the IRS uses 80% of the Fair Market Value for purposes of determining collection potential. This is to account for a taxpayer’s closing costs as if they had sold the property. Assume the $250,000.00 is 80% of the true FMV.
Eileen makes $4,000.00 per month working as a nurse and her monthly living expenses are $3,850.00 per month.
Now lets insert these numbers into our Reasonable Collection Potential formula:
A + ((B-C)x48) = D
Calculate A – The equity in the taxpayer’s assets
- Equity in Residence $40,000
- Equity in Vehicle N/A
- Equity in Jewelry $ 5,000
- Total Equity $45,000
Calculate B – The taxpayer’s monthly income
Eileen makes $4,000.00 per month.
Calculate C – Taxpayer’s monthly living expenses
Taxpayer’s monthly living expenses are $3,850
Now all of the variables have been assigned values as follows:
A + ((B-C)x48) = D
45,000 + ((4,000 – 3850) x 48) = 45,000 + ((250) x 48) = 45,000 + 12,000 = 57,000.
Eileen Levy’s reasonable collection potential (assuming she is able to provide documentary proof of the value of her assets, the amount of her debts and her income and expenses) is $57,000.00.
Making the Offer
Eileen should be able to get the IRS to accept an Offer in Compromise (IRS Form 656) on the $80,000.00 she owes for the amount of $57,000.00 thereby saving $23,000.00.
She must provide detailed supporting documentation proving the numbers claimed on her financial statements together with her calculation of reasonable collection potential.
Eileen will have to pay 20% of the offer amount, or $11,400.00 (20% x 57,000), as a downpayment with the offer.
If the offer is not accepted, the IRS will keep the down payment and apply it to the debt Eileen owes.
The balance of the settlement offer, $45,600.00, must be paid in a lump sum within 90 days after the IRS accepts the offer.
Paying the Offer Amount Over 24 Months
If Eileen could not pay the balance in a lump sum she could recalculate the offer amount substituting the number “60″ for the number “48″ in the above formula as follows:
A + ((B-C)x60) = D
The new offer amount using this formula would be $60,000.00. Eileen would then have to pay $12,000 (20% of $60,000) with the filing of the offer and the balance of $48,000.00 could then be paid over a 24 month period.
Taxpayer Warning
Do not trust anyone who tells you that you qualify for an Offer in Compromise unless and until they have asked you about your assets, liabilities, income and expenses and performed the above calculations.
OFFERS IN COMPROMISE: WHEN YOU DON’T OWE THE TAX
Offers In Compromise: When You Don’t Owe the Tax
By ppappas • February 6, 2009
The IRS will accept less than the full amount you owe if you can prove to it that there is doubt about the accuracy of the assessments against you.
Doubt as to Liability Offers are Rare
Offers in Compromise based on doubt as to liability are rare because the taxpayer has already been given several opportunities to dispute the liability prior to the assessment.
The IRS Manual states that,
Doubt as to liability exists where there is a genuine dispute as to the existence or amount of the correct tax liability under the law. Doubt as to liability does not exist where the liability has been established by a final court decision or judgment concerning the existence or amount of the tax liability.
Before a doubt as to liability offer can be accepted, there must be some doubt as to the correctness of the liability. Validity of the offer is determined by evaluating the supporting evidence and circumstances. The taxpayer is required to submit documentation and/or other evidence to support his/her doubt as to liability claim. The evidence available for both parties must be weighed in order to determine the extent of any “doubt.”
There are several circumstances in which a doubt as to liability offer might** be appropriate:
- You disagree with a penalty assessment and have not already challenged the assessment
- You disagree with an interest assessment and have not already challenged the assessment
- There is a mathematical error in the calculation of the taxes the IRS claims you owe
- You have been erroneously charged with a Trust Fund Penalty for failure to deposit an employing entity’s payroll taxes
- Subsequent to an Audit you have located additional supporting records and receipts that show that the Audit adjustments are incorrect
** The instructions for form 656-L (doubt as to liability offer) encourage taxpayers to consider alternatives to the filing of an Offer in certain cases, some of which are mentioned above. Pappas & Associates, P.A. exhausts all options for resolution before we recommend that our clients file a doubt as to liability offer.
The Making of the Offer
Doubt as to liability offers are made using IRS Form 656-L.
No financial statements are required to be provided with the Offer because you are claiming that you do not owe the tax debt, not that you cannot pay it.
You must provide convincing evidence of the doubt as to your liability or the IRS will reject your offer.
Types of evidence provided with doubt as to liability offers are:
- Additional receipts and records unavailable at the time of an audit examination
- Corrected penalty and interest calculations
- Cancelled checks proving payments of tax, penalties and interest that were not properly credited
- Court cases, Revenue Rulings and other legal authority proving that the assessment is either wholly or partially incorrect
Careful Research Required Before Filing Offer
Never file a doubt as to liability Offer without first consulting with an experienced Tax Attorney or CPA.
Success or failure depends greatly on the proper presentation and thoroughness of the Offer submission.
The mere filing of a Form 656 without substantial and convincing back up will result in its summary rejection and the possible imposition of penalties for filing a frivolous offer for purposes of delay.
Payment Due at Filing
No payment is due with the filing of a Form 656-L.
Factors Considered
The IRS considers a number of factors before making a final determination of whether or not to accept the offer.
The factors the IRS considers are
- Taxpayer is unable to work because of a disability.
- The liquidation of taxpayer’s assets would prevent the taxpayer from being able to meet basic living expenses; and
- The sale of the taxpayer’s assets would have adverse consequences on the taxpayer.
Compliance Record of Taxpayer Considered
If the taxpayer has a good record of past compliance with the federal tax laws that factor will be weighed in his or her favor.
This offer in compromise based on effective tax administration allows some taxpayers who are undergoing severe hardship the opportunity to have their tax liabilities reduced even though they technically can pay the full balance.
Effective Tax Administration Offers Very Difficult to Get
We have had several of these offers accepted over the years and in all cases the taxpayers were elderly and unable to work and needed what assets they had to fund their future living expenses.
We do not recommend the filing of an effective tax administration offer for people who are relatively young and able bodied.