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Do You Qualify for an Offer in Compromise? Do You Want One?


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2/5/2016
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Do You Qualify for an Offer in Compromise?  Do You Want One?

#1 - Check if You Are Pre-Qualified

Ever receive a “pre-approval” letter for a credit card?  In an effort to demystify the Offer-in-Compromise (“OIC”) process, the IRS has created a helpful “pre-qualification” widget on its website, which can be accessed here:

http://irs.treasury.gov/oic_pre_qualifier/

But, OIC’s are complicated, and the easiest way to understand if you qualify is to know what will disqualify you.

You are disqualified if:

  1. You have unfiled Tax Returns;
  2. You have not made Estimated Payments; or
  3. You have “Equity in Assets” that exceeds your “Tax Debt”.

You also cannot qualify if you are in bankruptcy and for a period of time after a bankruptcy.

You may qualify if:

  1. You are not disqualified; and
  2. Your annual disposable income is less than your “Tax Debt”.

Today you can save 75% more with an OIC than was possible in the past.

  • Old Offer-in-Compromise Program
    • Used 48 months of “disposable income” to calculate required offer amount. (i.e. if you have $1,000/mo of disposable income after allowable expenses, you would have to offer $48,000 to settle your debt).
  • New Offer-in-Compromise Program
    • Uses 12 months of “disposable income” to calculate required offer amounts. (i.e. if you have $1,000/mo of disposable income after allowable expenses, you would have to offer $12,000 to settle your debt).
  • Why is Now the Best Time to Get an Offer if You Qualify?
    • Historically, OICs made sense for people suffering from a severe economic hardship where they had virtually no disposable income after allowable expenses (as calculated under IRS guidelines in Section 5 of the IRM).  Even so, OICs traditionally did not represent a dramatic savings over what would be paid on an Installment Agreement.
    • Today, OICs are 75% cheaper than they have ever been in the past.

Today you have the best chances and the highest odds of being granted an Offer-in-Compromise in history.

https://www.irs.gov/pub/irs-pdf/f656b.pdf

Considering Your Options – When an OIC Makes Sense:

  • Of the 3 alternatives to a Full Pay Installment Agreement, the OIC is the most aggressive on the spectrum that runs from Partial Pay Installment Agreement, Currently-not-Collectible Status, to OIC.
  • A Partial Pay Installment Agreement (“PPIA”) is the logical choice for taxpayers who can pay something, but not the full Tax Debt.  This is also preferred by the IRS, because they can recalculate the amounts due if your income increases.
  • Currently-not-Collectible status is a good option when you can’t pay anything.
  • Somewhere in between Currently-not-Collectible, where you have no disposable income and are either unemployed or barely making ends meet, and a PPIA, where you are making a substantial payment every month of most or all of your disposable income, is the sweet spot for an OIC.

Considering Your Options – When an OIC Doesn't Make Sense – The Tax Probation Problem:

  • When you are granted an OIC, you are put on Tax Probation for a period of 5 Years!  That means you lose the benefit of the Offer and your entire tax debt becomes due and owing all over again if you generate a new liability any time within that 5 Year Period.

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Section 8 (Continued)                                                                 Offer Terms
Page 5 of 6


I must comply with my future tax obligations and understand I remain liable for the full amount of 
my tax debt until all terms and conditions of this offer have been met.


g) I will comply with all provisions of the internal revenue laws, including requirements to timely 
file tax returns and timely pay taxes for the five year period beginning with the date of 
acceptance of this offer and ending through the fifth year, including any extensions to file and 
pay. I also agree to promptly pay any liabilities assessed after acceptance of this offer for tax 
years ending prior to acceptance of this offer that were not otherwise identified in Section 2 of 
this agreement. If this is an offer being submitted for joint tax debt, and one of us does not 
comply with future obligations, only the non-compliant taxpayer will be in default of this 
agreement. An accepted offer will not be defaulted solely due to the assessment of an individual 
shared responsibility payment.

**************************

How Does the IRS Calculate Your “Disposable Income”?

 There are National Standards that specify the maximum amounts that are allowable for the computation of housing and utilities expenses, living expensestransportation expenses and out-of-pocket medical expensesfrom your total monthly income.  In specific (and limited) circumstances, the Internal Revenue Manual allows the Service employee to deviate from the standards)

National Standards

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/National-Standards-Food-Clothing-and-Other-Items

Local Standards

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Local-Standards-Housing-and-Utilities

 

Policy Statement P-5-100 in IRM 1.2.14.1.17, states:

The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An OIC is a legitimate alternative to declaring a case currently not collectible or a protracted installment agreement.

The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.



Category: Tax Law


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