IRS issues new rules for Offers in Compromise (OIC)

Dramatic Reduction in amount required to settle an IRS Offer in Compromise (OIC)!

In a dramatic change in policy the Internal Revenue Service has issued new rules for acceptance of Offers in Compromise.

In the past the IRS has required taxpayers to pay an amount equal to their excess income for 4 years, all payable upon acceptance of and Offer in Compromise.  They recently made a huge change and now allow OIC’s to be settled for the amount of excess income for 1 year. They must also pay the value of their equity in assets.

‘For example under the old OIC rules if a taxpayer had $1,000 of excess income they were required to pay the IRS $48,000 to settle an OIC.  Now, they only have to pay $12,000.  If they have only $100 of excess income they pay $1,200 to settle, no matter how much they owe.  They, however, must pay an amount equal to the equity in their assets in addition.  For more specifics visit http://www.martellelaw.org/offer-in-compromise

EQUITY IN ASSETS

Equity in assets generally means the quicksale value of property after exemptions.  Property exempt includes:

  • Household furniture and furnishings
  • Personal property
  • $3,450 equity in a vehicle per taxpayer (2 if married)
  • Up to $1,000 cash
  • Property necessary to produce income

The value of non exempt assets for Offer in Compromise purposes is calculated using a Quick Sale Value or Auction Value.

EXCESS INCOME

The amount of excess income is calculated by determining how much income the taxpayer(s) have.  Then what the IRS considers to be reasonable living expenses are deducted from the income.

The difference between the income and the expenses X 12 is the amount necessary to be paid to the IRS.

For example if the taxpayers have assets that are not exempt with a value of $1,000 and excess income of $100 per month, then they must pay the IRS $1,000 plus $1,200 ($100 per month times 12) for a total of $2,200 to settle their Offer in Compromise.

The amount that must be paid is not in any way tied to how much the taxpayer owes the Internal Revenue Service.  They could owe $20,000 or $200,000 and they would pay the same $2,200 to settle all of their tax debt!

The information in this article is very much a simplification, used to illustrate the new rules.  Offers in Compromise are very complicated.  You should consult with a Tax Attorney to get representation in submitting and negotiating an OIC.

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