Tax Tips

There are many companies and individuals out there who want to help you. Some can and do.  Others, however, charge large fees based on promises that not only do not materialize, they also never had a chance to materialize.

Many of these companies advertise on a national or local TV making such promises as “settle for $.10 on the dollar” by filing an offer-in-compromise (OIC). You should get second opinions and compare fees. Always check a company’s performance with the Better Business Bureau.

What you should know about OICs
All offer-in-compromise settlements are based on a strict formula applied by the IRS. There are no exceptions.

IRS generally does not look favorably on OICs when a person is temporarily unemployed or working at a lower paying job while in between higher paying jobs.

If you are unemployed or barely getting by, call IRS and explain your circumstances. They will likely put you in an "uncollectible" status or on a small monthly payment. "Uncollectible" status means they will not require or attempt to collect payment from you for a few months. They will check back with you to see if your status has changed.

It typically takes several months for IRS to respond after an OIC is filed. You will often be asked to update your financial data at that time.

All financial representations by the taxpayer are made under penalties of perjury (or fraud in more extreme cases) for making false statements.

The formula used by IRS in determining OIC settlements is as follows, and there will be variations based on individual circumstances:

The basic calculation is 48 times your ability to make monthly payments, determined by application of an IRS means test if you are paying the full settlement within 90 days after the amount is agreed upon.

If you need a payment plan to pay the offer, you are typically given 24 months, but must increase the multiplier from 48 times to 60 times your ability to make monthly payments.  There are longer payment plans available in some circumstances.

The means test that the multiplier is applied to works as follows:

You calculate your annual income from all sources including employment, self-employment, investments, alimony, child support, etc and then divide this number by 12. This number is your average monthly income.

The following is then subtracted from your monthly income to arrive at your “ability to pay.”

1. A living standard (food, sundries, etc. based on family size).

2. A housing allowance, which includes utilities, mortgage payment, rent, etc. This allowance is based on geographic location and family size.

3. Transportation costs including car payments, lease payments and operating costs.

4. Healthcare costs including healthcare premiums paid by you, not your employer, and recurring monthly expenses such as medications.

5. Income taxes – both state and federal as well as Social Security and Medicare taxes.

6. Daycare, student loan payments, and court ordered payments such as child support or alimony.

Subtract these from your monthly income and this is your “ability to make monthly payments.”

You then multiply this times 48 or 60, or whatever the case may be.

You must add all equities in any assets you own (fair market value minus any debt) to the above number to get your estimated offer amount.

The term “equities” as referred to the above include home or rental property equities, the value of investments and retirement plans, autos, boats, motor coaches, etc.

IRS will typically discount real estate and autos, etc. by 20% before adding these amounts to your proposed settlement.

Retirement plan equities are reduced by the amount of tax and penalties you would owe if they were distributed to you.

IRS will research your equity estimates especially for real estate, autos, etc.

After completing this exercise you should have a reasonable estimate of what any acceptable amount might be for you.

Research before you react
Always ask for a quick estimate based on the above before agreeing to hire anyone. Review each calculation carefully.

You can Google “national collection standards” to get the IRS allowances mentioned above.

If the company doesn’t want to show you how they came up with their estimate for you, do not hire them.

If you are a working couple with a home and a few assets $5,000 to $6,000 is an excessive fee. A more reasonable fee would be $2,000 to $3,000 for doing an OIC.

Alternatives to an OIC
If you cannot do an OIC, you will need to go on a payment plan with the IRS.

The amount of your monthly payment to IRS under an installment agreement is typically your ability to make monthly payments and is calculated the same way it is for the OIC referenced above. If you owe $25,000 or less and can make a monthly payment based on dividing the amount you owe by 36, IRS will, in most cases, automatically grant your request.

If the above is more than you can pay monthly, you can negotiate using the IRS tables and your monthly income.

When you hear about IRS levies on paychecks or bank accounts, liens being filed, etc., it is probably because you, or someone you know, failed to respond to several notices.

Please, do not stick your head in the sand or hide in the closet. Things will only get worse.

Just call IRS at the number on your notice. In many cases, you will be surprised at how easy it is to work out something.

If that doesn’t work, then get help.

Joe

Learn more about Joe DePetris, Jr., and IBO tax return preparation and tax issues at IBO Bookkeeping 101.

Find more Tax Tips for IBOs from Joe DePetris, Jr., CPA.

This article is provided as an educational resource for your guidance, and is strictly informational. It does not constitute legal, accounting, or other professional counsel. Nothing included herein implies a recommendation by the author, the IBOA International, or Amway Global, of any course or method of regulatory compliance. Readers and users who intend to take, or refrain from taking, any action based on information contained herein should first consult with their qualified tax advisor, preferably a C.P.A., or appropriate regulatory authorities.