My firm specializes in helping taxpayers out of tough situations with the IRS and we have dealt with countless situations where the client is in way over their head in debt to the feds with no way to pay it. We understand your dilemma and our job is to help you find a way out.
First of all, there are many options for repaying your tax debt that will not completely wipe you out. Keep in mind that the IRS really is not out to break taxpayers and if you are cooperative and demonstrate good faith, they will work with you.
One of those options is an Offer in Compromise is (OIC). In this section, I am going to explain what an OIC is and walk you through the process. Once you have read this, if you believe this is a solution for you, give me a call and we can discuss it further.
Please do not fall for those TV ads where a company promises that they can miraculously wipe out your IRS debt for pennies on the dollar. These are often “bait and switch” deals to get vulnerable taxpayers through the door to turn over hard-earned money and receive little in return. This is the time to turn to a trusted experienced tax law professional.
What Is Offer in Compromise?
An Offer in Compromise (OIC) is a type of agreement between both the taxpayer and the IRS outlining and settling the taxpayer’s tax liabilities for less than the current balance due. If the taxpayer’s liabilities can be fully paid through the utilization of an installment agreement or any other related means, then the taxpayer would not ordinarily be eligible for an OIC.
To be eligible for the OIC program, the taxpayer must have already filed all tax returns, made the required estimated tax payments for the current year and if they are business owners with employees, also made all required federal tax deposits for the current quarter (IRS.gov, “Topic 204 – Offers in Compromise,” 8/21/2013).
Those are the first steps.
The Offer in Compromise Process
Taxpayers currently in an open bankruptcy proceeding will not be eligible for an offer in compromise. Tax liabilities and other financial debts are resolved through the process of bankruptcy only. If you do not fall under this category, then the IRS will accept an OIC on three grounds. First, if you have genuine doubt with regard to your tax liability, then you will need to complete Form 656-L, Offer in Compromise (Doubt as to Liability).
Second, acceptance of an offer in compromise will be permitted if it is determined that the amount you owe is fully collectible. Lastly, “an offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances” (“Topic 204”). In addition to submitting Form 656-L, taxpayers must also complete and submit Form 433-B (OIC), Collection Information Statement for Businesses.
It is important to note that penalties and interest will continue to accrue during the evaluation process. You must only submit an offer for tax years that have been assessed by the IRS. The taxpayer must submit all required forms and fees as part of the application process. The IRS offers guidance that provides insight into the process as well as application materials.
Net Realizable Equity in Assets
The net realizable equity in assets is defined as a calculation of the fair market value of the property multiplied by the quick sale discount factor, or 80 percent, subtracted by the balance of any loans secured by the property. The net realizable value of your assets is specific to cars, real estate, and personal property.
The Asset/Equity Table
The asset/equity table (AET) is defined as a table that lists all of the taxpayer’s assets, encumbrances, and exemptions. The table calculates “the equity which is included in the reasonable collection potential (RCP) calculation” (IRS.gov, “Part 5. Collecting Process, Chapter 8. Offer in Compromise, Section 4. Investigation,” 8/24/2013).
The major headings of the asset/equity table include the following: assets, fair market value, quick sale reduction percentage, quick sale value, encumbrances or exemptions, and net realizable equity.
Under each major category, the taxpayer lists information concerning different types of assets. References to assets include cash/bank accounts, offer deposit, loan value life insurance, pensions/IRA/401k, real estate, furniture/personal effects, vehicles, accounts receivables and tools/equipment.
On the table, the taxpayer calculates the amounts and lists the future income value. The IRS allows exemptions based upon the total dollar amount of the assets. With regard to cash/bank accounts, net equity should not be less than zero.