The Internal Revenue Service receives about 60,000 offers in compromise each year and accepts about 38% of those filed.
Most of those offers and compromises that are accepted are filed by professional firms that have on staff tax attorneys, tax lawyers, certified public accountants, enrolled agents or former IRS agents.
Before we tell you everything you need to know please understand that I would not contemplate filing an offer in compromise on your own because of the very specific standards that IRS uses to qualify a taxpayer for an offer in compromise. The average Internal Revenue Service agent probably spends about 20 hours investigating every offer in compromise and the IRS have very tight financials formulas and acceptance standards for the OIC.
The offer in compromise is not for everybody.
I should know I am a former IRS revenue officer, teaching instructor and an expert in the IRS tax debt settlement program called the offer in compromise.
You should also know that there is a pre-qualifier tool that is available to you. You can find on our website and any taxpayer/ client can walk through to find out if they are a qualified candidate for the offer in compromise or tax settlement program.
No offer in compromise should be filed unless the individual has walked through the pre-qualifier tool to make sure they have a solid chance of getting their offer in compromise accepted.
You will find below all the questions that are asked on the pre-qualifier tool and the financial statement that is required to be turned into Internal Revenue Service for the offer in compromise program.
The IRS Pre Qualifer Tool
The pre- qualifier tool is used by Internal Revenue Service to make sure taxpayers understand the offer in compromise program.
Due to the Internet being loaded with companies and individuals stating they can settle their case for pennies on a dollar the Internal Revenue Service is trying to make the public aware that they can find out for themselves whether they qualify for this program. If you call our office we can walk through the program with you in about five minutes and let you know whether you are qualified
Below you will find out the questions that are asked on the pre-qualifier tool.
So be apprised, these are the questions you were to be asked by the Internal Revenue Service for your offer in compromise. Also it should be noted that this tool is used by the IRS collection division anytime you owe the IRS money.
The questions asked on the Prequalifer Tool
This tool should only be used as a guide. the reason that I say that this should be used as a guide is simple. Sometimes there are unique circumstances that shape a particular offer in compromise and sometimes IRS is willing to settle for less if the theory of the effective tax administration comes in the play.
Preliminary Questions that are asked :
Before IRS can proceed to accept your offer in compromise you must answer yes to these questions:
1. Are you in an open bankruptcy proceeding?
2. Have you filed all required federal tax returns?
3. Have you made all required estimated tax payments?
4. If you are self-employed and have employees, have you submitted all required federal
If you answer no to these questions IRS has the right to stop the offer in compromise and rejected immediately.
IRS cannot work your offer in compromise if you were are in an open bankruptcy proceeding and they can choose to reject your offer if you have not filed all your federal income tax returns and are not current in the year you are filing the offer. Being current simply means you have made all required estimated tax payments or you have the proper amount of withholding being taken out of your payroll check to cover your taxes.
I hate to say this but, as a general rule on IRS will look to reject any offer in compromise before they accept it because of the sheer amount of work it takes for a person to get an offer in compromise accepted. It must be signed off by their manager, by the regional manager in the district Council of the Internal Revenue Service
As a former IRS agent I can tell you it’s a lot easier to find reasons to reject the the OIC than to bring them to managers to have them accepted, sad but true.
The IRS is only interested in two assets to settle your case with an offer in compromise and they are:
1. Your income,
2. Your assets.
General Information the IRS will want to acquire. The income and expense side.
The Internal Revenue Service will only allow certain necessary living expenses and those only.
They will plug your expenses against the national, regional, and geographical expense standards and allow you the “average monthly expenses”.
IRS will only accept reasonable expenses to make sure you’re living within your means therefore in every area in the United States the Department of Labor have come out with statistics to show what average reasonable expenses .
IRS will expect you fall within those means.
The Internal Revenue Service will disallow the expenses over above the standard. The sum total of the expenses over the standard are thus multiplied by 12 and become part of the income side of the offer in compromise.
Information relative to the National Standards
Collection Financial Standards are used to help determine a taxpayer’s ability to pay a delinquent tax liability.
Allowable living expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer’s (and his or her family’s) health and welfare and/or production of income.
National Standards for food, clothing and other items apply nationwide. Taxpayers are allowed the total National Standards amount for their family size, without questioning the amount actually spent.
National Standards have also been established for minimum allowances for out-of-pocket health care expenses. Taxpayers and their dependents are allowed the standard amount on a per person basis, without questioning the amount actually spent.
Maximum allowances for housing and utilities and transportation, known as the Local Standards, vary by location. In most cases, the taxpayer is allowed the amount actually spent, or the local standard, whichever is less.
Generally, the total number of persons allowed for necessary living expenses should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return.
If the IRS determines that the facts and circumstances of a taxpayer’s situation indicate that using the standards is inadequate to provide for basic living expenses, we may allow for actual expenses. However, taxpayers must provide documentation that supports a determination that using national and local expense standards leaves them an inadequate means of providing for basic living expenses.
As far as the asset side
As far as the asset side is considered IRS wants 100% of the total liquidation value of all your assets. You will find out below what list of assets IRS will consider.
Information required by the Pre-Qulifer Tool
IRS will want you to enter information about your location, household and tax debt.They will want to know your:
1. ZIP or postal code
4 .Total members of household
5. Total members of household 65 years or older.
The IRS wants this information to apply the national standards for expenses in the area and the location you have plus the number of exemptions.
Total IRS tax debt (whole dollars)
1. What is the most recent tax year you are requesting to compromise?
Your Assets – These are the assets IRS will be inquiring about.
The Internal Revenue Service will require all liquidation values to be part of your offer. If you add up the following liquidation values on the below assets IRS will accept nothing less.
Total bank balances (checking, savings, money market, CDs, etc.)
Home market value
Home loan balance
Vehicle 1 equity
Vehicle 2 equity
Retirement account equity (401k, IRA, etc.)
Other real property (rental, business, land, timeshare, etc.)
Other asset equity (airplane, motorcycle, recreational vehicle, etc.)
Stocks, bonds and other investments
Miscellaneous (art, coin and gun collections, etc.)
Information about your monthly household income.
a. Gross wages
b. Interest and dividends
c. Distributions from partnerships, sub-S corporations, etc.
d. Net rental income
e. Net business income
f. Child support received
g. Alimony received
h. Rent or mortgage and utilities
i. Vehicle 1 loan or lease payment
j. Vehicle operating costs (gas, repairs, etc.)
k. Total vehicles owned
l.Public transportation costs
m.Health insurance premiums
n. Federal, state and local taxes (Enter a 0 if no taxes)
o.Court-ordered payments (child support, alimony, etc.)
p.Child dependent care costs
q. Life insurance premiums
Select a payment option
Your initial payment will vary based on your offer and the payment option you choose:
Lump Sum Cash: Submit an initial payment of 20 percent of the total offer amount with your application. Wait for written acceptance, then pay the remaining balance of the offer in five or fewer payments.
Periodic Payment: Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.
Downside to Submitting an OIC
Completing the forms is just the beginning. After you submit the forms, the IRS will ask you for rafts of financial documentation — pay stubs, bank records, vehicle registrations, and myriad other items.
This is an exhaustive, time-consuming process on the part of the Agent.
Some taxpayers wind up submitting files upon files of documents to the IRS to support their OIC request.
If your OIC is rejected, the disclosures you made about your assets give the IRS all the information it needs to accelerate its collection efforts against you.
For this reason, it makes sense not to submit an offer unless it is likely to be accepted. That is why going through the pre-qualifier tool on our website to help assure you have a more likely chance of acceptance.
Remember that interest keeps accruing during the offer in compromise negotiation process, meaning you’ll end up owing more than ever if you cannot make a deal.
Contact us today to learn more about the filing of an offer in compromise. When dealing with our firm you will be talking to a tax attorney, tax lawyer, certified public accountant or former IRS agent, manager tax instructor.
Free consultations are available upon request.
Offer in Compromise = Everything you need to Know = Former IRS Debt Settlement Officer
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