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IRS Offer in Compromise RequirementsIRS Offer in Compromise Requirements
By now, you’ve undoubtedly heard the radio commercials: “Settle your tax debt for pennies on the dollar…”
The program being referenced is called an Offer in Compromise, and it actually does allow you to pay a reduced amount of money as settlement in full of your entire tax liability, including penalties and interest. However, it’s not as simple as the commercials make it sound.
What most of those commercials are implying is that you take your tax debt, multiply it by some percentage, and then you just pay them percentage and walk away. Unfortunately, that is not how it works.
Part of determining whether you are even eligible to apply for an Offer in Compromise has to do with the formula used to determine how much you will need to pay. The formula is somewhat complicated, but an incredibly simplified version looks like this:
· Add up the value of everything you own: House, cars, furniture, jewelery, guns, stocks, bonds, cash, retirement accounts, tools, goats, art….EVERYTHING. Call this number “A” – it represents the value of your assets.
· Subtract your allowable expenses (the IRS won’t let you claim all actual expenses) from your total income. Call this number “B” – it represents yours remaining income (this is what the IRS calls it – not your disposable income, which is probably less).
· Multiply “B” times either 12 or 24, depending on how long you’re going to take to pay off the Offer in Compromise. Call this new number “C”.
· A + C = Z, where Z is the amount of money you can settle your tax liability for.
Here’s the kicker: If “Z” is more than you actually owe the IRS, then you’re not eligible for the program, and you’re going to end up paying monthly payments on an Installment Agreement.
In addition to this formula, there are some other conditions for Offer in Compromise applicants:
· You must file all missing tax returns.
· You must keep your nose clean with the IRS for 5 full years, otherwise they will re-bill you for everything they forgave.
· You must make the Offer in Compromise payments on time.
· You must pay an application fee, unless you meet the low income guidelines.
· If you end up being owed a refund on next year’s tax return, the IRS is going to keep that refund money.
The real problem for most people with the Offer in Compromise application process has to do with the part where they multiply your remaining monthly income by 12 or 24. If you have $1,000 per month left over, and are going to take a year to pay off the Offer in Compromise, then you multiply by 24 to get to $24,000. Well, if you also have $20,000 equity in your home, and no other assets, then your Offer amount is $44,000. If you owe the IRS $35,000, you’re not eligible for the Offer in Compromise program.
It’s worth noting that, in March 2012, the IRS changed some of the Offer in Compromise rules. The single biggest thing they did was to REDUCE that multiplier — it used to be 48 or 60. For taxpayers with no assets, this change effectively reduced the necessary Offer amount by up to 75% — making potentially hundreds of thousands of people eligible for the program that didn’t used to be.
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IRS Installment Agreement RequirementsThe IRS refers to a monthly payment plan as an “Installment Agreement”, or “IA” for short. In order to enter into a payment plan to resolve your back tax liabilities, you must meet a number of basic requirements. We assist our clients in meeting these requirements, and then negotiate the actual payment amount after you are eligible.
Here are the basic requirements to be eligible for a payment plan:
1. File any missing tax returns.
2. Begin making current estimated tax payments (for self-employed people) or Federal Tax Deposits (payroll tax payments for businesses), if applicable.
3. Disclose specific financial information, such as income, expenses, and assets.
4. Demonstrate that you cannot pay off the tax debt from savings, a loan, or other means.
5. If you owe less than $10,000 in tax, be able to pay off the entire debt in 3 years or less. If you owe $50,000 or less, you get 5 years. If you owe more than $50k, there is no time limit.
6. Not have defaulted on another IA in the past 5 years.
The most difficult part of this process for self-employed and small business taxpayers is #2 — finding the money to begin making payments on their CURRENT tax obligations. This will involve some painful elimination of expenses and changing of priorities that most people don’t like, but is necessary. Remember, the IRS is your most powerful creditor, so it’s best to get them taken care of, even if that means damaging vendor relationships, not paying other bills, etc.If you are eligible, then obtaining a payment plan is actually pretty straightforward. But as mentioned above, getting into current compliance is a critical first and second step, and is the most difficult part for most taxpayers.
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SFR not dischargeable- Upon Final SFR Debt AssessmentCouresy of Larry Heinkel, Esq
Recall an SFR (substitute for return) is a "return" prepared by IRS when the taxpayer himself fails to timely file one. SFR tax debts are not dischargeable in bankruptcy. The taxpayer still needs to file his own return and, two years later, hopefully (if all other tests are met) the tax debt can be discharged. That is true if the actual return is filed before the final SFR assessment is made. But what if the SFR assessment is made, the taxpayer is notified of the SFR debt, and then the taxpayer files his actual return. Can it be discharged two years later?
Unfortunately, a growing number of cases say "no". One of the most recent cases is out of the bankruptcy court for the Eastern District of NY (see Casano v. IRS, 23 CBN 261, 473 B.R. 504, decided 5/16/12). It ruled (as have other courts) that once an SFR assessment is made, it can never be replaced by the filing of an actual tax return to start the two-year clock for dischargeability.
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IRS Plans to Enable Remaining Forms to be FiledThe Internal Revenue Service plans to allow more of the remaining tax forms that have not been available for electronic filing yet this tax season to go through during the first week of March.
In an email to software developers and transmitters on Wednesday, the IRS noted that due to late legislation, the IRS delayed startup for the tax forms listed below until the first week in March.
To ensure there are no issues with accepting the forms for downstream processing, the IRS is asking software developers and transmitters to adhere to the following plan:
The schemas and business rules will be deployed in the Production environment during the March 3, 2013 Sunday maintenance window.
When the Production environment becomes operational at 7:00 am Eastern Time, transmitters should only send their stockpiled inventory of tax returns they have held back, evenly spread throughout the day on Sunday, This will allow the IRS’s Modernized e-File system team to quickly review the reject trends for the returns to ensure the schemas and business rules work as intended. “Please do not enable online filing for the forms until the IRS officially announces the processing of these forms targeted for the first week of March,” the IRS asked.
Barring any problems, the IRS will then send out a QuickAlert email early in the week announcing the official opening. At that time, it will ask companies to enable online filing for these forms.
“As we have communicated throughout the filing season, we appreciate your continued partnership and support to ensure a successful startup!” the IRS added.
Tax Year 2012 Tax Forms Scheduled for Startup:
• Form 3800 General Business Credit
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