“ If you file for bankruptcy, timing is critical. The IRS cannot and will not entertain your OIC after you file bankruptcy.”
AN offer in compromise (OIC) allows you to settle assessments for tax, penalties, and interests at less than the assessed amounts. You can apply for an OIC if there is doubt as to liability or as to collectibility. The bases of an OIC are discussed in our other newsletters. Let me give you a few tips in preparing an OIC application for now.
1. If the tax due is a joint assessment, both husband and wife must submit the offer.
2. The offer must reasonably reflect your ability to pay.
3. The amount of the offer should be equal to or greater than the amount that the IRS will be able to recover through normal collection procedures including garnishments, levies, and seizures.
4. Your source of funds could be loans from relatives and friends or loans against your assets. The offer must be generally paid in full upon acceptance. There are few cases when short-term payments are allowed. Any deferred payment must specify the total amount of the offer and specific timeframes for the balance. (Example: “amount offered for $5,000, terms for $1,000 to be paid now and $4,000 to be paid within 30 days of acceptance.”)
5. Use Form 656. There have been several revisions so use the most current one.
6. Forms 656 must have original signatures (Copies and fax not acceptable).
7. State why the offer is being submitted. (Doubt as to collectability)
8. On offers based on doubt as to liability, attach documentation as to why you do not owe the tax. This is important because the degree of doubt influences the amount of your offer.
9. On offers based on doubt as to collectability, explain why the IRS cannot collect more from your current assets, present and future income. Document your living expenses, current income, the value of assets owned and the related encumbrances such as mortgages and car loans.
10. In valuing your properties, use “distressed sale” value. Do not use fair market values. Value your house, cars and other properties at about 75 to 85% of fair market value. That is what you would receive anyway if you were to make a quick forced sale.
11. Do not forget to claim exempt properties such as:
A. Furniture or personal effects in your household,
B. Tools of your trade or profession.
12. The government also looks at your future income by calculating the present value of a stream of income for the next five years at a current fair market rate of interest. In doing so, they consider your education, trade or profession, age and experience, health, and past and present income. (This is presently based on a factor of 49.64 times net monthly cash flow). Generally, you are no longer required to enter into a collateral agreement (except when there are strong indications of available funds as in the case of fluctuating income).
TIP: If you file for bankruptcy, timing is critical. The IRS cannot and will not entertain your OIC after you file bankruptcy.
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Victor Santos Sy, CPA, MBA, provides professional services in accounting and tax controversy including IRS audit defense and offers in compromise. He also advises clients on choices of entity including corporations for small businesses and LLCs for rentals. Vic worked with SyCip, Gorres, Velayo (SGV – Andersen Consulting) and Ernst & Young before establishing Sy Accountancy Corporation at 704 Mira Monte Place, Pasadena, CA 91101. The firm celebrates its 35th anniversary this year. You may email tax questions to Vic at [email protected]. You are welcome to visit our website for more than 300 tax tips at www.victorsycpa.com.