- Paul Carrano
What is an Offer in Compromise?
Suppose you are unable to pay your tax bill. In that case, there is an option available through the Internal Revenue Service where you can settle your tax liability for less, sometimes significantly, than what you owe. The option is called an Offer-in-Compromise.
Having the IRS accept your Offer-in-Compromise is not a guarantee. Last year, the IRS accepted 40% of the offers made, which is considered a very high number of offers accepted. To have your Offer-in-Compromise accepted, you first have to qualify. To first qualify, you have to show the IRS that one of the following situations exists.
“Doubt as to Collectability”
If there is a doubt that you will have the means to pay your tax bill now or in the foreseeable future, the IRS will consider your Offer-in-Compromise.
If you file an Offer in Compromise on the grounds of Doubt as to Collectability, you will have to show that you do not have the means to pay your tax liability.
The IRS will look into your debt on assets. They will look at the debt owed versus the value of the asset owned to determine the amount of equity in the assets you own. For example, if you own a house that is assessed at $500,000 and you owe $350,000 on the mortgage, you have $150,000 in equity in the home. The IRS will work on the assumption that if you have equity, you could refinance your loans to take the equity out to pay off your taxes.
Assets the IRS will look at includes:
Real Estate holdings
Investments and Retirement Accounts
Whole Life Insurance Policies
Cars, boats, etc.
Business equipment if applicable
Business Account Receivables is applicable
Any other valuable assets, such as an art collection
After the IRS determines what assets you own and the equity that is built up in those assets, they determine the collectability. This means that they look at your income and they subtract your necessary household expenses. These expenses include:
Rent or Mortgage
Food and Clothing
Auto loans and costs
Heath insurance and costs
Term Life insurance
Secured debt (secured debt are loans backed by collateral, such as a mortgage or care payment. Unsecured debt is not backed by any assets, such as credit card or medical debt.)
After the assets, equity, and collectability are determined, they used a fairly straightforward formula to determine if you will be able to pay off your tax liability now or in the near future. If they determine that you will not be able to do so, they will consider your Offer-in-Compromise.
Even if you are not insolvent or currently going through bankruptcy, you can apply for an Offer-in-Compromise on the grounds of economic hardship. This means that you cannot pay for the basic living expenses that provide for the health, welfare, and production of income for you and your family.
Items considered for economic hardship include:
Your ability to earn a living or circumstances that would cause you to not be able to earn a living, such as long-term illness, disability, illness, or medical condition.
Obligations to dependents
Extraordinary circumstances such as natural disasters, a medical catastrophe, or special education expenses
Inability to borrow against the equity in your assets or the inability to liquidate your assets.
Expenses considered to be affluent or luxuries are not taken into account. These expenses can include private school tuition, college expenses, voluntary retirement contributions, or unsecured debt, such as credit card debt.
Offer-in-Compromise is not an option for everyone. You will have to prove that you are truly unable to pay your full tax liability. If you feel you qualify, call our office to have a discussion about it. Remember that penalties and interest continue to accumulate during the long process of an Offer-in-Compromise, so if your offer is ultimately rejected, you will owe even more than when you started. There is also the consideration that if you submit all of the documentation the IRS asks for during the investigation process, they have the information they need to speed up the collection process if they reject your offer.
It is a great option if you qualify. If you do not qualify for an Offer-in-Compromise, all is not lost. There is still the option of paying your debt off over time. Having an installment plan approved is significantly easier at both the state and federal level than getting an Offer-in-Compromise approved if you do not qualify.