EFFECTIVE TAX ADMINISTRATION
Effective Tax Administration offers may apply where the taxpayer is ineligible for an offer in compromise based on either a theory of Doubt as to liability or Doubt to Collectibility. The taxpayer must establish that collecting on the tax liability would cause economic hardship or - in the alternative - where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment.
LIABILITIES ELIGIBLE FOR COMPROMISE
An Offer in Comprise can be submitted to settle any federal tax liability incurred under the Internal Revenue Code. This includes both business taxes and individual taxes. An Offer in Compromise can only settle taxes that have already been assessed. Income tax is considered assessed on the date the return is due.
The IRS looks at the taxpayer's income and assets to make a determination of the taxpayer's reasonable collection potential. OICs are subject to acceptance on legal requirements. The IRS recognizes that many taxpayers are still struggling to pay their bills so the agency has been working to put in common sense changes to the OIC program to more closely reflect real world situations.
When the IRS calculates a taxpayer's reasonable collection potential. it will now look at only one year of future income for offers paid in five or fewer months, down from four years and two years of future income for offers paid in six to 24 months, down from 5 years. All offers must be fully paid with in 24 months of the date the offer is accepted.
ALLOWABLE LIVING EXPENSES
The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer's ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluaing installment agreement and offer in compromise requests.
OFFER IN COMPROMISE DETAIL
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The Offer in Compromise (OIC) program is an Internal Revenue Service (IRS) program which allows qualified individuals with an unpaid tax debt to negotiate a settled amount that is less than the total owed to clear the debt. The objective of the OIC program is to accept compromise when acceptance is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements
At least one of three conditions must be met to qualify a taxpayer for consideration of and OIC settlement.
DOUBT AS TO LIABILITY
Taxpayers who file an Offer base on a theory as to doubt as liability will need to establish that they have not otherwise have an opportunity to dispute a tax liability. If the IRS can show that the taxpayer received the proper notices of assessment and failed to act on them or otherwise contested the tax in the context of an audit, the taxpayer will not be able to seek this sort of relief. An Offer in Compromise based solely on the basis of Doubt as to liability does not require the submission of financial information.
DOUBT AS TO COLLECTIBILITY
Doubt as to collectibility means that the tax payer will never be able to fully pay the tax bill. The IRS will consider a settlement base on the following formula:
Settlement amount = Monthly disposable income X a number of months + the net realizable equity in the taxpayer's assets.
Disposable income is monthly income minus allowable monthly expenses. It is important to recognize that the IRS will not allow all expenses the taxpayer may actually have. Common disallowed expenses are college tuition payments for a dependent and credit card payments.
The number of months over which disposable income must be calculated into the offer amount is based on the smaller of the number of months remaining until the Collection Statute Expiration Date for the tax debt or either 12 or 24 months depending on the payment option for the OIC which the applicant is selecting.
Net realizable equity in assets is the quick sale value of the asset less any liabilities.