When you owe a debt to the IRS, you might wonder what your options are for satisfying it. Rather than pay a tax debt that you cannot afford, you could settle it for less by making an Offer in Compromise to the IRS. By using these strategies, you better the chances of your IRS Offer in Compromise being accepted the first time you submit it for consideration.
Determine Your Reasonable Collection Potential
Your reasonable collection potential is the amount of money that the IRS believes that it can collect from you over a reasonable amount of time. To determine this amount, the IRS uses a specific formula. Depending on what that amount is, you should offer the same sum of money or perhaps a little more when submitting your Offer in Compromise or OIC to the government.
If you fail to offer an amount that is equal to or more than your reasonable collection potential, you stand a good chance of your OIC being turned down by the IRS. It will believe it can collect more money from you to settle your tax debt.
You can figure out what your reasonable collection potential is by using the same formula employed by the IRS. This formula is based on two different factors: The liquidation value of your assets and any extra monthly income you will receive over the next four to five years.
To begin calculating your reasonable collection potential, you first should add up the cash you have on hand and in your bank accounts. You should then add that sum to the value of investments and liquid assets including your:
- Real estate
- Retirement accounts like Roth IRAs
You should then multiply the fair market value of these assets by 80 and subtract the amount of any outstanding loans you have against them. The amount you have left over is asset liquidation value.
To determine your extra monthly income, you should figure out what money you have over after you pay for your basic living expenses. Deduct expenses like rent or mortgage payments, utilities, and groceries from your monthly income that you earn from your job, self-employment, retirement or pension, or investments. Multiply that amount by 48 or 60 to determine the amount of money you would have left over the next four to five years.
Your next step is to add your total disposable income, cash on hand, investments, and the liquidation value of your assets to get your reasonable collection potential. You should use this number to determine how much to offer the IRS when making an Offer in Compromise.
What is an Offer in Compromise?
An OIC can be a legitimate option for settling the debt when you cannot pay the debt in its entirety. It also is a solution for when paying back the tax debt would create an extreme financial hardship for you.
When the IRS considers an OIC from a taxpayer, it looks at criteria like the person’s:
- Ability to pay the tax debt
- Regular living expenses
- Asset equity
It may approve the OIC if the amount offered equals or is close to the amount that the IRS can expect to collect in a reasonable amount of time.
That being said, you should look at your other tax debt payment options before submitting an OIC. This form of payment is not for everyone. You should also hire a tax professional to make sure you meet all of the criteria for making an OIC.
Using the OIC Pre-qualifier
If you want a preliminary look at whether or not you might qualify for an OIC, you can use the free pre-qualifier on IRS.gov. This tool asks questions like:
- Are you in an open bankruptcy?
- Have you filed all of your required tax returns?
- Have you made all of your estimated tax payments?
- If you are self-employed and have employees, have you submitted all required federal tax deposits?
Based on the answers you give to these questions, you can learn quickly if you might qualify to have your OIC approved by the IRS.
Submitting an OIC
To submit an OIC, you must use the required forms found on IRS.gov. The first form is Form 656-A, which is the income certification form for an OIC. This form must be filled out and submitted in order for the IRS to waive the processing fee and the 20 percent down payment for an OIC if you qualify.
The next form, 433-A, is used to gather income information for wage earners and people who are self-employed. This form will reveal whether or not you experience financial hardships because of your tax debt. You must disclose details like your income, assets, and expenses before the OIC can be completed.
Why Hire Top Tax Defenders before Making an OIC?
The IRS outlines the process for applying for and getting an OIC on its website. Even so, you may find the process to be complex and confusing. You do not want to jeopardize your chances of having your OIC accepted the first time you submit it to the IRS.
You also may not like the idea of approaching or negotiating with the IRS on your own. You may not know what the tax codes are or how they apply to your tax debt situation.
Top Tax Defenders has an experienced and knowledgeable staff who can help you make an OIC successfully. We have represented clients like you in the past and know what it takes to get an OIC accepted the first time you submit it to the IRS.
If your OIC is denied, we also can help you appeal the decision. Our staff knows what documents to submit and what kind of proof the IRS is looking for to reconsider its denial of your OIC.
An Offer in Compromise could be your best option for settling your tax debt satisfactorily. Making this offer requires you to follow an exact process outlined by the IRS. You can better your chances of having your OIC accepted the first time by hiring our tax professionals at Top Tax Defenders today.