Big news from the Offer and Compromise (OIC) front. On May 21, the IRS announced more flexible terms to help a greater number of struggling taxpayers make a “Fresh Start” with their tax liabilities.
This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years,
said IRS Commissioner Doug Shulman.
It is part of our multiyear effort to help taxpayers who are struggling to make ends meet.
This announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC.
The biggest change is that when calculating your reasonable collection potential the IRS will now look at only 12 months of future income for offers paid in five or fewer months and 24 months of future income for offers paid in six to 24 months. This is huge and it can save a lot of taxpayers a lot of money.
If someone made $13,000 of income a month and had $8,000 of allowable expenses a month, the IRS would subtract the allowable expenses form the income and determine that the taxpayer had $5,000 of Remaining Monthly Income. They would then multiply that number by 48 (months) to get $240,000 of Future Remaining Income as part of their offer in compromise analysis. So even if this taxpayer had no assets, the IRS would expect that the Offer Amount be no less than $240,000 without there being special circumstances.
Now the IRS will multiply the $5,000 by 12 months and the Offer Amount can be as low as $60,000.
Moreover, another big change is that now taxpayers can use expenses such as credit card payments and bank fees and charges for their Allowable Living Expenses under the National Standard miscellaneous allowance.
Many people who could not qualify for an offer in compromise will now be able to qualify. We have dozens of cases in our office that we can now revisit.
It may help to consider a very simple hypothetical to decipher an offer amount for the purposes of an offer in compromise.
Megan has a home worth $400,000 and her loan balance is $300,000. She has a printing press worth $500,000 in a business she owns. Her printing makes her $144,000 a year which is the total income she nets from her business. She has a car that is paid off and worth $20,000. She has a 401K worth $40,000 which she has used to secure a loan for $30,000 which she used last year to pay for a medical surgery for her daughter. Megan also has a whole life insurance policy that will pay $60,000 to a beneficiary. Megan owes $250,000 in back taxes to the IRS. Her allowable monthly expenses are $9,000 a month.
Let’s find out what her Offer Amount would be for Offer in Compromise purposes.
First we will figure out the Available Equity in Total Assets. Megan’s home is worth $400,000 but the quick sale price of her home is $320,000 or only 80% of its fair market value. When Megan’s loan balance of $300,000 is subtracted from the $320,000…
Her home has an Available Equity of $20,000 for Offer in Compromise purposes.
Megan’s printing press is worth $500,000; however, under the new rules since it is producing an income stream which is going to be includable in her future income (calculated later), the IRS will not consider the equity in the income producing asset in Megan’s business…
Her printing press has Available Equity of $0 for Offer in Compromise purposes.
Megan’s car is worth $20,000, but the quick sale value is only 80% of the fair market value of her car…
Her car has Available Equity of $16,000 for Offer in Compromise purposes.
Megan’s 401K has a current accumulated value of $40,000 however the IRS will usually consider only 70% of its value if it were liquidated which gives us a liquidated value of $28,000. Suppose also there was a loan against the 401k for $30,000. We would subtract the value of the loan as well and we would be left with
-($2,000). However, this negative value would not be netted against other assets. (Similarly if the taxpayer has real estate which is “underwater,” the negative value will not be netted against other assets with equity.)
Her 401K has Available Equity of $0 for Offer in Compromise purposes.
Megan’s whole life insurance policy will pay out $60,000 to a beneficiary. However it’s available equity will depend on a number of factors and so the policy must be valued. Let’s assume the cash value of the policy would be only 70%.
Her whole life insurance policy has Available Equity of $42,000.
Megan’s Available Equity in her Total Assets is $20,000 + $0 + $16,000 + $0 + 42,000 or $78,000.
We must now add on Megan’s Future Remaining Income…
Megan is a self-employed individual and makes $120,000 a year or $12,000 a month, her allowable monthly expenses are $9,000. She has $3,000 a month of Remaining Monthly Income. If Megan agrees to pay the liability within five months the Remaining Monthly Income will be projected for one year or only 12 months. Therefore her Future Remaining Income is $36,000.
Thus Megan’s Offer Amount would be…
Her Available Equity in her Total Assets $78,000
Her Future Remaining Income $36,000
Her Offer Amount $114,000
If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC. An analysis of a taxpayer’s collection statute expiration date is essential in assessing whether an offer in compromise is likely to succeed.
Abajian Law assists taxpayers in determining whether they will qualify for an IRS Offer in Compromise and if not, what their available options are. Vic is a former IRS attorney and was in charge of approving or rejecting offers in compromise (OIC) while working for the IRS. His insider knowledge is invaluable to clients. To learn more about your options, please contact Abajian Law for a consultation.