Debt can be a nightmare. There is little sympathy in the world of debt collecting. Debt collectors have one job: getting the money owed in full. Personal excuses do not matter to them, raising the anxieties of the taxpayer. When the IRS is breathing down one’s neck, it’s a stressful event. Luckily, there are options available.
One of the key options is filing for an Offer in Compromise. It serves as a comprehensive way to handle tax liabilities, basically offering to pay the IRS less than the full owed sum. In return, the rest serves as a liability that the IRS writes off. Sounds like a great option, right?
The reality of the Offer in Compromise
The Offer in Compromise is a great solution, but if everyone got it, the nation would go bankrupt. In other words, many apply, few get it. That is exactly why getting help to put together an application could be the difference between more stress and a brighter financial outlook.
Trying to convince a debt collecting agency that they should take less than they came for is not easy. The IRS will assess a taxpayer’s Offer in Comprise by starting with the following equation:
(Monthly Income – Monthly Expenses) X 12(Or 24) months= ?
So, they’ll start with the monthly income of the taxpayer, find the net difference between that and the monthly expenses, and multiply that net difference by 12 or 24, depending on the number of months it would take to pay off the offered debt.
Now the above equation is merely the start. The IRS will also add the net realizable equity in assets to the income and expense part of that equation. Basically, what happens is an assessment of the taxpayer’s bank accounts. After adding up the total account balances the IRS subtracts a $1000 allowance. Plus 80% of the value of assets such as property, vehicles and retirement accounts. Subtracted from the loan balance that is on that asset as well as whatever allowances there are for more personal vehicles.
The IRS can accept the offer or reply to the taxpayer with a counter offer.
How offer payments work
They’re submitted via payment either in a lump sum or periodic payments:
Lump sum payment: 20% down payment of the offer must be paid with the offer, with the remainder of the offer due within five months of the acceptance.
Period payment method: Offer amount is paid over 24 months beginning with the first offer. These periodic payments will continue to be due while the IRS reviews the offer. If the IRS rejects the offer, the payments will simply apply to the tax debt.
What about low income taxpayers?
They may qualify to send in their offer with no down payment or periodic payment. Also, taxpayers typically have to pay $186 just to apply. Low income taxpayers do not.
The prime candidates for an Offer in Compromise are taxpayers who have a marginal net income after considering reasonable living expenses but who also have nearly none or zero equity in their assets. Or if their debt is substantial even compared to a robust income and equity in assets.
Building a case for an Offer in Compromise requires a lot of work. Bringing in an attorney who is familiar with tax law and debt could make a huge difference and provide a more educated idea of what a taxpayer’s outlook is, and what the best methods are to proceed by.
The answer is intended to be for informational purposes only. It should not be relied on as legal advice, nor construed as a form of attorney-client relationship.
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