Making a Deal with the IRS.
We assist clients of our Atlanta CPA firm with the IRS Offer-in-Compromise program. An Offer-in-Compromise means that the IRS will accept less than the total amount of tax owed by the taxpayer to settle their tax debt.
At its most basic, the Offer-in-Compromise program is a formula. An offer will not be accepted if the taxpayer fails to consider the formula and makes an offer that has no chance of success. As long as the taxpayer’s offer meets or exceeds the IRS formula, then the offer should be accepted.
The Offer-in-Compromise process at our Atlanta CPA firm consists of several steps.
First, we ensure that the client meets the basic requirements to qualify for an offer. This includes an analysis of the client’s tax compliance history and a determination of where the client stands in the 10-year collection Statute of Limitations. This step requires a careful review of the client’s IRS transcripts. It should be noted that IRS transcripts are notoriously confusing and difficult to interpret.
Second, we perform a detailed financial analysis to determine whether or not the client qualifies for the Offer program, or any other IRS program, to resolve their tax debt.
Third, we prepare a the required the Offer package for submission to the IRS, with all required supporting documentation.
Then, we wait. Assume that it will take at least 6-8 months for the offer to be processed. If the offer is not accepted, we have the option to go to Appeals. That, of course, takes even more time.
The Offer Formula
The Offer-in-Compromise formula is called Reasonable Collection Potential. It is based on two calculations: net equity in assets and future income.
Net equity in assets is computed based on an 80% “quicksale” value, less any mortgages or other debt on the property. The calculation considers bank accounts, homes, cars, retirement accounts and other personal assets. A number of special exceptions also need to be considered.
The future income calculation is the taxpayer’s gross monthly income, less allowable expenses. Allowable expenses are based on a complex combination of actual expenses, national standards and local standards.
The formula may be modified by dissipated assets, changes in average income due to a job loss and potential future income.
There are two types of offers:
- A Lump-Sum Offer means that the taxpayer agrees to pay the offered amount in less than six months upon acceptance of the offer. A check for 20% of the total offer is submitted to the IRS with the offer application. The remaining 80% must be paid to the IRS at the end of the six month period.
- A Short-Term Deferred Offer means that the taxpayer begins making monthly payments on the offer while the offer is being considered. The balance of the offer is due within 24 months
The Statute of Limitations
We sometimes see that a client is eligible to make an offer, based on the offer formula. However, the offer will not be accepted because the client is able to pay the tax in full over the time remaining on the 10-year Statute of Limitations. An installment agreement usually works better in these cases.
Do I Have to Sell My House and Car?
Clients sometimes ask us if the IRS expects them to sell their house or car when making an offer. The IRS does not care where the client gets the funds to make the offer. They can borrow it from family, friends or a bank. The IRS is only interested in the payment of the agreed upon offer amount to settle the debt. Therefore, selling your house or car is not required to make an offer.
Georgia Offer-in-Compromise Program
The Georgia Department of Revenue also has an Offer-in-Compromise program. The State will generally approve an offer when the amount offered represents the most the State can expect to collect within a reasonable period of time. Each case is evaluated based on facts and circumstances.
We expect that the economic downturn of 2020 related to Covid-19 will result in a significant increase in the number of Georgia taxpayers who are unable to pay their taxes. Fortunately, the IRS provides programs for taxpayers to resolve their tax debts. The most popular program is the Offer-in-Compromise, probably due to many late-night tv ads. Other programs are payments plans (also called Installment Agreements) and Currently not Collectible status. The courts offer bankruptcy protection, which is an option to consider in certain situations.
Feel free to reach out to my firm to discuss the Offer-in-Compromise, or any other IRS or Georgia tax relief program. Our office is in the Buckhead – Sandy Springs area of Atlanta, which is an advantage to those looking for a local firm to handle their tax matters.
Founded by Gary Massey, CPA, Massey and Company is a boutique CPA firm located in Atlanta, GA, serving the needs of small businesses, business owners and individual taxpayers. Our services include tax preparation, tax planning, taxpayer representation, IRS audits, monthly bookkeeping and accounting.