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IRS Audit Manual: Secrets to the IRS Offer in Compromise
The commercials on TV run endless about settling with the IRS for pennies. They make it sound like it is too good to be true or at least a difficult process only they can resolve. In fact, the IRS Offer in Compromise program is simple. It is one of the few areas I think some people can handle on their own. You will do 99% of the work anyway no matter who you hire.
Later in this article I will outline how much to offer the IRS. This is the big secret advertisers don’t want you to know. Once you know what to offer, it is a simply matter of filling in your information, offering the lowest amount the IRS will accept, and filing.
The waiting and gathering of all your personal financial data are the hard parts. The IRS can take over a year to review your Offer in Compromise and then may require additional information within 10 days. If you fail to provide the data, the Offer in Compromise is considered withdrawn.
Follow the rules to the letter. I will provide a guide here to help you along. When the IRS asks for re-verification of your financial condition, provide it by the due date set by the IRS. Don’t let your hard work go to waste.
IRS Offer in Compromise
Offer in Compromise Books
Types of Offers in Compromise
An Offer in Compromise is an agreement between you, the taxpayer, and the IRS, to settle a tax liability for less than the full amount. There are three types of offers the IRS will consider:
Doubt as to Collectability: This accounts for most Offers in Compromise. In this type of offer, the tax you owe is not in doubt. The problem is you will never be able to satisfy the debt in a reasonable amount of time. This article will focus on this type of offer only.
Doubt as to Liability: Here the IRS took a position in an audit that is questionable. This type of offer attempts to settle the account without Tax Court.
Effective Tax Administration: You owe the tax and are able to pay most or all of the tax. However, doing so requires you to end cancer treatments on your minor child. The IRS looks at the facts and circumstances and will consider a settlement that allows payment of a fair amount that does not cause undue hardship.
How Much to Offer
This is the big secret the advertisers keep tight to their vest so they can charge you $5,000 and up for data entry. My office does offers on a regular basis. The first thing I tell a client when they sit down is the formula the IRS will use to determine an acceptable offer.
Are you ready for the big secret? The formula the IRS uses as a minimum offer they will accept? Here it is:
- Quick sale value of assets, plus
- 24 months of disposable income
That is it. Now what does it mean?
Quick sale value is 80% of fair market value. Example: You own a home worth $100,000 with a mortgage of $75,000. Quick sale value is 80% of $100,000, or $80,000. Therefore, based on assets, your offer must be at least $5,000 ($80,000-$75,000 mortgage).
Disposable income is derived by subtracting certain expenses from income. The IRS calculates expenses a little different than most folks. Many expenses are listed in the National Standard Table available at www.irs.gov. Certain expenses (food, clothing, personal care, supplies, and miscellaneous) must come from the Table regardless of your real out-of-pocket expense. You do better here if you are frugal.
Example: You earn $3,000 per month. You have a 4 person household, so you get $1,371 for the items listed above. Add your car and mortgage payments of $1,500. Your expenses are $2,871 ($1,371 + $1,500). Your income ($3,000) minus expenses ($2,871) leaves you with a disposable income of $129 per month.
Using the example above, disposable income is $129 x 24 months = $3,096
Your minimum offer the IRS will accept is: $5,000 from assets plus $3,096 from disposable income, or $8,086.
If anyone charges you a fee to file an offer for less than the above formula, run. You can calculate your Offer in Compromise on the back of an envelope to get an idea of what your settlement will look like. Offer less and you are denied; offer more and you are over-paying.
There are three ways to pay for an Offer in Compromise.
Lump Sum: This is the one you want. Trust me on this. You are required to pay an application fee of $150, due when you file Form 656, Offer in Compromise. Twenty percent of your offer is due with the application.
Short-term Payment Plan: Payment of full offer in 24 or fewer monthly payments.
Deferred Payment Plan: All payments are made at any time in full within the statute of limitation. The IRS has 10 years to collect from you or they cannot collect. Offer must include payment within the 10 year limit.
The IRS accepts fewer offers on payment plans and payments are non-refundable. If you default, you start all over and the IRS keeps your money.
Forms and Fees
File Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. Form 433-A is not required if your Offer in Compromise type is “Doubt as to Liability.”
Filling out each form is straight forward. Most information requested involves your income and sources and expenses with verification. Use the formula above to calculate your lump-sum offer.
A $150 filing fee is due with Form 656 and is non-refundable.
Take your time when filling out Forms 656 and 433-A. Your numbers must be as accurate as possible. Include all documentation requested. Fill in all information requested.
The IRS will take a few months to over a year to review your Offer in Compromise, usually over a year. When the IRS gets around to reviewing your offer, prepare to provide all your updated information again within 10 days of the IRS request or your request is considered withdrawn and you have to start all over.
File and pay all future taxes by the due date. If you fail to do so within five years of an accepted Offer in Compromise, the IRS can withdraw the settlement offer and you start all over again.
An Offer in Compromise settlement does not make life easy, just tolerable. You can clean up a tax mess and move on. Use the OIC opportunity to get your life back. Don’t re-dig the hole.