An Offer in Compromise is a great way to solve a tax delinquency. Generally, the IRS will accept an offer if it can be convinced that it is doubtful that the liability can be collected in full within the collection statute of limitations (10 years). There is also a less common “Doubt as to Liability” offer, filed by taxpayers that can make a case that the tax is legally not owed (use Form 656-L).
To file a “Doubt as to Collectability” offer, Forms 656 and 433-A(OIC) are submitted to the IRS along with the substantiation requested beneath the signature line on the Form 433. Unless certain low income criteria are met, the IRS requires a non-refundable filing fee (currently $150) when the offer is submitted.
Use Form 433-A (OIC) (433-B OIC for businesses) to calculate the amount of your offer. Generally, the offer amount will be based on 80% of the fair market value of your hard assets, minus any liens that are senior to the lien of the IRS. For example, if the fair market value of your house is $100K and you have a $60,000 mortgage, which is senior to the lien of the IRS, then, for offer purposes, the value of the asset is $20,000 ($100K x 80% = $80,000 – $60,000= $20,000). Cash assets, like bank accounts are valued at 100%, stocks and bonds at 80%, and retirement accounts at 70%.
Once the value of all assets are determined, the future value of income is calculated and that value is added to the asset value to determine the appropriate offer amount (Assets + Future Value of Income = Offer Amount).
Generally, to calculate the future value of income, the taxpayer’s monthly gross income minus monthly expenses (capped at certain standardized limits set by the IRS) will yield a “remaining monthly income” amount. The remaining income amount is then multiplied by either a factor of 12 or 24 depending on how fast the taxpayer plans on paying off the offer amount.
If you wish to utilize the 12 times multiplier, and therefore, usually pay a lower overall offer amount, you must pay 20% of the total offer amount upfront with the submission of the forms (and the filing fee). If and when the offer is eventually accepted, the remaining 80% of the offer amount must be paid within five months from the date of acceptance (the IRS sends a letter stating that the offer has been accepted and the rest of the money is due by a certain date).
Remember, both the filing fee and the 20% down payment are non-refundable whether the IRS accepts or rejects the offer. The filing fee is not applied to your tax liability, but the 20% is applied.
If you want or need more than five months to pay the offer amount, an extended, up to twenty-four months may be requested. This option requires the use of the 24 factor multiplier to calculate the future value of income. Also, the 20% non-refundable down payment is not required. However, you must start making the monthly payments with the submission of the offer and continue to make them either until the offer is fully paid, or until the IRS rejects the offer.
For example, you offer $12,000 payable at $500 a month for 24 months. The first $500 payment, plus filing fee, is sent in with the offer. One month later, another $500 must be sent in whether the IRS has responded or not. The next month another $500 is due and so on. This continues until either the IRS rejects the offer, or $12,000 is paid in. If the IRS accepts the offer before $12,000 is paid in, then the payments continue. If the IRS accepts the offer after $12,000 has been paid in, no further payments are due. If at any point during this process a payment is missed, the IRS may return the offer without considering it further.
There are certain additional “strings” attached to an accepted offer. The most dangerous string is the five year compliance clause. If the IRS accepts an offer, the taxpayer must remain compliant with any tax return filing and tax paying obligations for a minimum of five years. Failure to comply will default the offer and any unpaid compromised tax liabilities will be owed by the taxpayer all over again.
Also, the IRS will keep any tax refund that becomes due through the calendar year the IRS accepts the offer. For example, if the IRS accepts an offer on July 1, 2012, then the taxpayer will not receive any refund that may be due for 2012 (payable in 2013).
Finally, there are other binding terms related to an accepted offer concerning claim preclusion and statute of limitation issues and others. These terms must be carefully reviewed prior to submission.
Make sure you fully understand all the terms and conditions you are agreeing to before you submit your offer. The timing of an offer submission and the designation of the payments (to specific tax years) can greatly impact your chances of a good resolution.
Talk to a tax attorney at the Winspear Law Group before you submit your offer. Make sure you have the best chance of success and are not wasting your money.