Offer in Compromise - 80% Rejected by IRS
Posted by Dean Alexander on Thu, Dec 10, 2009
Let us start by defining what an offer is. An offer is one of three solutions, no fourth (unless you pay the full amount of debt in cash.) If you have a tax problem with the IRS, you will end up doing either an installment agreement, seek to be declared uncollectible or non-collectible classification as sometimes they refer to it, or make an offer in compromise.
Offer in compromise is then one of IRS debt settlement solutions whereby we offer IRS an amount less than what you owe. The question is how much and how do we determine that? In general, you must think as follows: The IRS will not accept any amount less than they can grab from you. IRS is not in the business of charity. I have seen IRS seizure of cars of people who are on social security and have kidney failure!! Ruthless? In this instant, yes. Is there a way to avoid this? Of course, and that is another animal unto its own.
So, we offer the IRS what they think they can take. If we have $500 that they see in our bank we must offer them that plus any thing else that they see we have equity in. To calculate the equity, we will only offer them 80% of the fair market value of the assets that we are reporting minus liability on it.
Here's an example:
John is unemployed with no income and owes the IRS $150,000. He has $750 in the bank. He owns his house with a fair market value of $100,000. The loan on the house is $75,000. His equity on the house according to this calculation is $25,000 (value of $100,000 minus $25,000 loan.) So, at first glance one may think that we should offer IRS $25,000 for the equity in the house and 700 for what we have in the bank for a total of $25,700. Correct? If you have done that, I have a water front property in Arizona, as they say to sell you. If we were to do that offer we will make an offer on the $150,000 IRS problem for only $5,700.
How did we figure the $5,700? Remember that I said that we will offer IRS only 80% of the fair market value of the house. Since the fair market value of that house was 100,000. 80% of this amount is $80,000. Since we don't own the house outright and that the bank owns $75,000 in that house (the mortgage amount), what is left really is 5,000 after the bank gets his cut and title company when well the house. Add $700 which is in the bank to the offer of $5,000, that brings the offer to settle amount owed to IRS for back taxes to $5,700.
Notice in the example above that I said that John is unemployed. I did that not make an assumption that the IRS feels sorry for unemployed folks and thus accepts lower offer in compromise just for that, but the purpose was to say that he has no income that the IRS takes a stab at, either voluntarily or via income and wage garnishment.
So, now we are ready to give John some monthly income to make the picture more realistic. Let us say that John makes $5,000 per month and his expenses are $4,900 a month. That means he has $100 to spare every month. Does the IRS look for an amount as little as $100 per month. You bet. You will be surprised to know that the $100 a month could be worth $12,000 of debt owed to IRS, more of explanation to come later. Let us assume that the collection statute of limitation is still available in full to the IRS (10 years in which the IRS can chase the takes payer.)
In this case the IRS looks at the $100 as I stated above to be worth $12,000. How is that? $100 of monthly surplus means $1,200 a year. Since the IRS can take this amount via wage garnishment or by a negotiated settlement for 10 years then you are looking at $12,000. In this instance, John who has owes IRS 150,000 for back taxes and has a house worth $100,000 and $700 in the bank, we can offer the IRS the following:
Amount from house equity as we explained $5,000
Amount from $100 monthly surplus that we must offer 12,000
Amount we currently have in the bank 700
The total for the offer then must be $17,700
To summarize, our offer now is composed of amount of income over expenses and the net assets.
More to come on following blogs