5 Reasons Your Offer In Compromise is Getting Declined
Five Reasons Your Offers and Compromises are Getting Declined
Yes everybody has seen the ads on television with the overzealous salespeople over-promising something they don’t even know what they’re talking about. Taxpayers hear about “Pennies on the Dollar.” Yes, everybody loves the offer and compromise but most people (including tax professionals) don’t understand how it works.
Remember, an offer in compromise is asking the IRS to accept less than you owe. You are effectively asking the IRS to charge off the debt you owe them. There is no god given right to getting an offer. Everything submitted to the IRS for an offer must be substantiated with proof.
Here is five reasons why are your offers are not getting accepted.
For the purposes of an Offer In Compromise, compliance means:
1. Filed all tax returns for the past 6 years
2. Paid current for this year.
For a wage earner this means you have filed each of the last 6 years and you are currently having sufficient withholding taxes taken out of your paycheck every month.
For a self employed taxpayer this means you have filed each of the past 6 years and you have made ALL of your estimated tax payments for this year.
For non-filers, rules are the same… file for the past 6 years, even if it means you haven’t filed in 7 or more years. For the non-filers, this is oftentimes the most difficult part of the offer… it’s time to get your financial act back together and get into compliance, and stay in compliance!
For the non-filers this is often the most difficult aspect of the offering compromise simply said it’s time to get your financial back together get into compliance and stay in compliance.
Number 2: Understanding Reasonable Collection Potential (RCP)
Reasonable Collection Potential is the process of evaluating your ability to repay the debt to the IRS. The IRS will look at your income and IRS allowable expenses. They will then subtract your monthly allowable expenses from your monthly income to determine your monthly remaining income (aka disposable income).
First, the IRS will determine your monthly gross income from all sources. This includes wages, self employment income, Social Security Income, dividend and interest income, disability income and more. Remember, the IRS already has all your income data on record so let’s not waste anyone’s time here by trying to under disclose your income.
Your IRS allowable expenses are a little more difficult to calculate. First of all the IRS will grant an allowance for food, clothing, household good and other miscellaneous items. The allowed expense for this based on the number of people you claim on your income tax return. Housing and utility allowances are also limited based on the number of people you claim on your tax return and the county you live in. (Think for a moment that the standard cost of living is more in Beverly Hills, CA than it is in Kansas City, MO). The IRS allows for a automobile expense of up to $497 per automobile (up to one for each tax payer) or the actual car payment, whichever is less.
Additionally, they IRS allows for vehicle maintenance expenses. Health insurance and out of pocket medical expenses are also allowed. FICA that you are currently paying every month is allowable, so is dependent care expenses, court-ordered expenses, and payments made to the state for delinquent taxes owed to the state.
Other expenses are allowed in more out of the ordinary cases such as union dues, costs with work uniforms and some student loans. Keep in mind that the IRS will require that you provide proof of each of these expenses to determine your monthly allowable expenses. Credit card debt and unsecured loans are NOT considered allowable monthly expenses in the eyes of the IRS.
So back to the Reasonable Collection Potential…
Once the IRS has determined your monthly remaining income they want to know how many months until the IRS debt expires. The IRS will then multiply the two number together.
RCP = Monthly Remaining Income X Number of Months to Collect
… but wait, there’s more!!!
Number 3: Assets
Before the iRS will accept a balance reduction, they want to know all about your assets and net liquidation value of these assets.
Do you own a home or an automobile? Cash in the bank or brokerage account? How about cash surrender value of a life insurance policy.
Let’s walk through an example of net equity in an asset…
Net equity in Assets is the the quick sale amount. Let’s say you own a home with a value of $300,000 and you owe $160,000. The quick sale of the home is $300,000 X 80% = $240,000. The IRS will take the quick sale, $240,000 less the amount owed of $160,000 = $80,000 and determine that the house represents $80,000 in reasonable collection potential. In this example, if you owe less than $80,000 you can be expected to full pay the balance to the IRS and you will not be granted an Offer in Compromise.
If you have the ability to full pay the debt based off of net asset value, you are automatically disqualified from obtaining an Offer In Compromise. Otherwise, the IRS will evaluate all of your assets and determine your net equity value in assets. Net equity in assets will be added to the remaining income totals from the previous step.
Therefore, the Total RCP = (Monthly Remaining Income X Number of Months to Collect)
+ Net Equity in Assets.
You send in an offer with a number less than what you have calculated here, you’d better expect a counter-offer, if not an outright denial.
Step 4 What are you Not Spending Your Money On?
Now here’s where a true tax professional can earn his value. Let’s say you have a remaining income of $700 per month and the IRS still has 72 months to collect on the debt. You also happen to drive a hunk of junk with no car payment. Your RCP is $50,400. Instead, you go buy a car and the new payment is $497 per month (the limit under the IRS guidelines). Now your remaining income is $203 and your reasonable collection potential is $14,616.
Remember, the IRS allows for monthly payments for health insurance, term-life insurance and disability insurance. These are legitimate expenses and can be used to reduce your reasonable collection potential. In order to get credit for these expenses you will need to show a 3 month history of making the payments. At this point you may need to buy some time (figuratively speaking, not literally) with the IRS before you submit your offer but it can work to your advantage in the log run.
What you are not spending your money on can be equally as important as what you are spending it on to get an accepted offer.
Number 5: Staying in Compliance
Really it sounds ridiculous that this needs to be mentioned but it happens…. You were granted an offer in compromise. Congratulations! You’ve just been handed a “golden ticket’ from the IRS. Now all you have to do is file on time, and if you owe, pay on time for the next 5 years. This is one of the provisions of the offer. If you carry a new tax debt or don’t file, you risk having your original offer become voided and you will now owe that balance once again (with of course, penalties and interest included).
I hope this helps all of you with amazing, accurate offers that will be accepted in the future.