In an Offer in Compromise (OIC), how much is required to be paid to the IRS?
Usually the determining factor in deciding whether to file an Offer in Compromise is the amount necessary to settle with the Internal Revenue Service.
How does the IRS determine how much a Taxpayer must pay to settle an OIC?
There are basically 2 criteria: the amount of the equity in the taxpayers assets and the amount the IRS could get from the taxpayers excess income, after deducting reasonable living expenses. This article will deal with the amount of equity in assets. This is the starting point to calculate how much it will take to settle an Offer in Compromise. The information in this article is simplified and general. For specific information, contact a Tax Attorney.
Value of Assets in an Offer in Compromise
The IRS starts with the equity in assets, based on a quick sale value. This amount must be paid in an OIC. The IRS starts with the quick sale value of the asset. This is usually considered to be 80% of its actual value. Then they deduct any exemption.
For example if a taxpayer has a car worth $10,000, the IRS considers the value to be 80% of that or $8,000. If the taxpayer owes $2,000 on the car, that amount is deducted from the value, leaving $6,000 in value. The IRS allows in an Offer in Compromise a $3,500 exemption. So, the value that must be paid to the IRS in an OIC is $6,000 less $3,500 or $2500.
Each asset is valued in a similar fashion. There are many nuances concerning exemptions. If a taxpayer is in business, any assets, such as equipment that are used for the production of income are not included.
This is a huge change, which has made it far easier for taxpayers in business to file Offers in Compromise. It used to be that taxpayers had to pay the value of all business assets. That made it difficult for small businesses to file an OIC.
There are many items that are exempt and are not included in calculating the amount necessary to pay the Internal Revenue Service to settle an OIC. Examples include furniture and personal items, exemptions for vehicles, some money in the bank and a variety of other exemptions. To determine how these exemptions apply to your particular situation, please contact us.
This is the first test for how much must be paid to settle an Offer in Compromise (OIC). The second test is how much of a taxpayers future income must be paid to the IRS. That will be discussed in the next post. For more information about Offers in Compromise, please visit our website