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Offer In Compromise Advice – Killer Support
Despite what a collection of internet vulture representatives on the web told you, you may not qualify for an offer. Do you actually qualify for an Offer? Let’s see…
A two part formula is used to see if you qualify. Take your income, and deduct allowable expenses (you need the IRS allowable expense chart for this). Your result is the amount the IRS feels you can pay each month after paying your “necessary living expenses”. Then multiply this number by fifty. Next add it to the equity (that is how much you pocket for yourself if you sold the item at a bargain sale) in each of your assets. For example…add the equity in your house, car, retirement plan, rental property, stocks, etc. to fifty times the monthly amount. Multipliers may vary, this is just an estimate. The result is the total amount the IRS expects from you now in a lump sum. Or if you can pay it out over two years (maybe more) with interest added, you can do that instead. This calculation is subject to the IRS’s opinion of the value of your assets, and the allowances they will give you when computing how much money you have available to pay monthly.
The offer divisions take the attitude that they are not obligated to do an offer for anyone that they don’t want to. They also get pressured to meet quotas, and do so at the last minute. So what I have experienced happen over the years, is that non qualifying offers sometimes get accepted and qualifying ones (really deserving ones) sometimes do not. Obviously you do not want your offer to be turned down. Offers need to be worked consistently, (it is not a static process), sometimes for almost 2 years! The good news, is that offers can be quickly filed again after they are turned down.
Download the offer in compromise book from the IRS’s website. The key of course to a low offer is in the 433a and 433b(if needed). Please review the sections concerning these forms. Offers are also used to resolve a doubt as to liability. Let’s say you are charged a tax that you really don’t owe. You have either exhausted your appeal rights, or they have expired. Filing an offer is a way to get these rights back. You present your best argument to the offer division, and if you are poor, even though the instructions say that a 433a is not necessary, fill one out. Doing so shows that your income is low, especially if the expense items allowed are less than your income. The IRS will probably be more sympathetic if they know they can’t get more money out of you anyway.
So Here’s Your Checklist For Doing An Offer:
- Prepare an offer – download the forms 433A (and 433B if needed) and the form 966. Use 656-A for your income certification if your income is low enough so you are exempt from paying the application fee, and/or payments. Use form 656-PPV to accompany any monthly payments you make under the offer, starting with the first one. Mailing addresses will vary, so please check the one for the offer location you are sending to.
- Fill them out, and send them along with your backup receipts, payment of processing fee, and required payment. See the instructions for computing this. Also check the chart to see if you are exempt from paying the fee and/or payment.
- Do follow up calls and make sure that your offer is accepted for processing.
- Respond in a timely manner to requests for additional information. Make sure the offer division acknowledges receipt of the information prior to their deadline.
- Make sure you have a conversation with the offer professional prior to their preparation of what the offer amount should be. Call and ask how the review is going, and let them know you are available for questions. This way you can explain things before they come to conclusions on their own.
- Don’t argue too much. This is your big chance for a reduction. You will probably have to pay more than you think is fair. Just make sure they don’t make big unfair adjustments against you. Don’t sweat the small stuff.
- If you think they are grossly wrong about what you should have to pay, you can appeal, or submit an offer later.
- Exercise patience. Offers get kicked around a lot and may have to be refiled in the process . Yes, you will have to update the forms and redo you proof of income and expenses. Maybe more than once. Hang in there, and remember to be patient. It hopefully will be worth it all in the end.
- Be prepared, even a year later to submit updated income and expense information. Make sure your income didn’t go up, or you didn’t pay a large expenditure.
More Critical Information: Offer In Compromise Advice
If the IRS feels that your situation is temporary and it benefits them to do so, they may elect to average the prior three years. The burden of proof will be on you to show that your current immediate situation is an accurate projection of your income over the next 5 years (or remaining statute of limitations on collections). You will have to show that the last three year average is higher than your projection because of an extraordinary situation that is not likely to repeat itself.
The offer division likes to use the prior year’s tax return as a guide for showing what your income and expenses are. If it is within the first few months of the year, and it benefits you to do so then use that. Of course you will then have to lower your income over the next few months so that it closely resembles or is less than the prior year.
It is beneficial to look at income and expenses “per month”, so you can group together a number of months back, as a way to support what you are representing as your income and expenses on form 433a. For example, it is Sept. and you are preparing your 433a to submit as part of an offer in compromise. You could include the info for July-Sept (three months as the instructions show) or expand it to June-Sept, or Mar-Sept if that would be more favorable for you. Also, include information about projected future income. Give them proof beyond just your word.
Get letters from your physician to support how your current medical condition does not allow you to work more hours then you currently are. This will support you having a low income too. The more proof the better.
If you own a house, get an appraisal of it that supports your value. If it is close to their estimate they will more than likely use yours. If a very large difference they will push for their value. Don’t worry, this is an issue that IRS appeals will take and force the collection division to use what they feel is the most reasonable value.
Does your spouse stay home to care for your healthy teenage kids? The offer division may not accept a spouse not working. You will be hard pressed to prove that it is absolutely necessary for your spouse to not even work part time! Maybe they should get a job before filing the offer. Yes it will hurt the offer amount, but it will increase the chances of acceptance.
The main taxpayer, who has the liability (or joint liability) needs to be working too. You should not file saying that you were laid off last month and that you are looking for a job. Get a job before you file. Remember, the IRS has to be comfortable that the offer amount they accept is the most that they can get out of you over the remaining collection statute. Obviously, once you do get a job your income will be higher, so your ability to pay them more money will be greater.
It’s o.k. to file the offer before you get your first paycheck on your new job. Just indicate on your cover letter that you will send in the pay stubs when you get it.
Sometimes the liability is just yours. However your spouse must take part in the offer process and sign the financial statement (433a), and include their income and expenses to arrive at the monthly amount available after allowable expenses are deducted from income, even though she/he may not be liable for the tax, and will not be signing the offer form 966. If you are married and have a prenuptial agreement or have kept your income, expenses, income tax filing, etc. separate, you have a good argument for keeping your spouse’s information out of the offer process. You will be able to deduct only 1/2 of your living expenses, so you must see which way benefits you the most. Usually if your spouse has an income much greater than their share of the living expenses, using 1/2 of the deductions and only your income will be better. Different state follow different practices, so always be prepared to carefully explain and document what you are doing.
How Not To Break Your Payment Plan Or Your Offer In Compromise. Also, Making Sure You Qualify For An Offer In Compromise From A Compliance Standpoint.
You do this by keeping in compliance. This means filing and paying on time as follows…
Each taxpayer is responsible for their own companies or individual compliance with tax filings and payments of taxes, and installments under an IRS agreement. You cannot obtain an installment agreement, or an offer, or even appeal a decision (and get proper consideration) from an IRS employee, without all of your tax returns filed. All income tax returns and all business returns you are associated with must be filed.
Individuals (non business)
All installment payments must be received (and noted as such by the IRS) by the due date. The payment should clearly reflect what periods and years are being paid. Even if taxes are being taken out of your paycheck and you never had to make payments before, if you owe tax when you file your return, you will break your installment agreement. In fact, any liability assessed to your personal social security number will break the agreement. This includes trust fund from a corporation where you were a responsible party for the corporation not paying their payroll taxes! It does little good to establish an agreement if you know that sometime in the near future you will have a tax liability assessed to you.
Individuals (with payroll from a sole proprietor schedule c business)
In addition to the above, all payroll deposits must be made on time for the correct amount. “Not a day late or a dollar short”. I mean this literally, it is your responsibility to see that all payments are made on time for the correct amount. If you hire an accountant or payroll service then make sure you review the worksheets and verify that the amount is correct and that the payments are made on time. I have seen many installment agreements and offers broken because people trusted others to do just this. It’s o.k. to hire someone to help, but since your payment plan or offer can be broken by this, why not take the extra step to see that it is being done right!
All tax reports (the ones applicable to you), 1120, 1120s, 1065, 941,940, 1120 ES etc. must be filed on time. This means by the due date including any extensions. This is also very critical. If mailing, check the correct address and send registered receipt.
Offer Qualifying
Individuals must of course have their 1040 personal returns and current estimated taxes filed and paid on time. If you have payroll, you must have the last two-quarters paid on time. Not a day late or a dollar short to be able to file.
Forms 433A and 433B
See the “Owing The IRS” page.
Form 656 Instructions – The Joe Mastriano, CPA Way
Section I. Remember that separate offers need to be done for each account. So pull the record of account under your social security number, your wife’s social security number and under the joint numbers. Make sure your returns are filed correctly. Sometimes the accounts are mixed up. Call ACS and have them fix the records of account. Once straightened out, or even before it is straightened out, especially if you have a collection deadline, prepare your offer in compromise forms.
Any liabilities for periods under a separate ID number must be put on a separate 656 as a separate offer with a separate offer fee.
A joint liability will require a separate joint offer form too.
Any business liabilities, under a separate ID number will be a separate offer as well. However, different business ID’s can be combined on the same offer form.
So, depending on who the offer is for, you will have up to three separate forms to fill out. You can divide your offer amount proportionally under each form. Put a note on the forms to alert the reviewer at the IRS which other offer forms are part of you offer request. They will consider all of them together.
Section l. Fill in section 1 with the correct name, address, and ID number.
Section II. Fill in the type of liabilities you are attempting to compromise. They will be the periods and years that show up on the record of account that you pull from the IRS. The revenue officer can get that for you. I would rather trust my own request, just in case they leave some periods of liabilities out. However, the worst that can happen here is that the offer gets kicked back to you with a request to include the periods you left out. Then you make the adjustments and send it back to the offer division.
Section III. If you are submitting an offer based on doubt as to liability, meaning that you don’t owe it in the first place, you must fill out form 656-L instead of this form. The two choices are doubt as to liability, and effective tax administration. The first one is the most common. That is why you are filing this offer in the first place. You can’t pay off the full amount within the statutory period of collection. Just check this box if your assets can fully pay off the liability, but your exceptional circumstances would cause an undue hardship. Funny, I think everyone qualifies for this. After the IRS cleans you out of your assets and the biggest monthly payment you can possibly make, who wouldn’t suffer an “economic hardship”! But the IRS has a different interpretation than mine. Let’s say for example, you are 70 years old and your health is bad. You are living on social security, and you have equity in your house greater than your tax liability. You’ve lived there for 30 years and paid off the mortgage. Using the offer formula, your house is worth 0,000 and 80% is 0,000, and you only owe 0,000. You don’t qualify for an offer under doubt as to ability to pay. But given your health and income situation, if you borrowed against the house, you couldn’t make the payments. You probably wouldn’t qualify for a loan anyway. Not to mention, moving you out of the house would cause great emotional stress. I would argue for a minimum offer, because the IRS can’t get more money from you. They may argue that you take out a reverse mortgage and pay them whatever the bank is willing to give. I suggest hiring me in this type of circumstance. These are hard offers to get accepted, and admittedly I have had trouble doing so.
Section IV. The terms. I have gone back and forth with the IRS many times to get this section straight. I won’t confuse you with my experiences. Be careful to read the instructions and do the math. Don’t sweat this, if the offer specialist thinks the amounts should be different, they will send the offer back and ask you to redo it. No problem, you already know they will probably do that anyway.
Section V. The conditions you are agreeing to. I like this. Anytime the IRS boldly points out to you what they require of you. You give away some legal rights here. Sometimes it is easier to file an offer based on doubt as to ability to pay, instead of going to appeals to lower an audit adjustment. Let me explain. You are audited, and the adjustment causes you an additional tax liability of 0,000 on top of the ,000 you already owe for that year. You could pay someone to fight an appeals case to lower the 0,000 to perhaps 0,000,(because you have receipts and you think the auditor was not fair). However, you feel that, why bother because you project that you will only have to pay ,000 at most in an offer, based on your calculations. Now you sign part V(j) that says “Upon acceptance of the offer you agree to give up your rights to contest the liability”. You do the offer, and break it later because you missed a payment. Too bad, you just lost the ,000 potential adjustment (that reduced the liability from ,000 to 0,000). You can avoid this by making sure you do everything possible to lower a tax liability before you file an offer. Sometimes it’s easier said than done. Please take the time to understand each section the best you can.
I’ll have to keep in mind that the only reason you would file your own offer, unless you have the IRS experience, is that you are broke and can’t afford to hire a representative. In which case the above may not matter. You may be able to work out a payment plan that doesn’t pay the full balance. I’ve done some of those. You need to ask the collection officer what their current policy is on that. It varies.
Section VI. Explanation of Circumstances- I’ve seen other representatives in the past not put in the time and attention needed here. You are painting a picture for the IRS to see how poor you are, and your lack of ability to pay the liability in full. So make sure you let them know of your illnesses, lack of education, skills, etc. The recent depression, down turn in business, current layoffs in your company, the business contract that probably won’t renew, the alcohol program you just joined, the psychologist you are going to, the drugs for medical conditions you are taking, etc.. Make them realize how bad your life is in the first place, on top of now having to give them most everything you have to settle the liability.
I wouldn’t tell them that you will file a bankruptcy if they don’t accept an offer. They may take this as a threat. Their opinion has been that if you are going to file for bankruptcy, then just do it.
Section VII. Source of funds- I usually just write that money will be borrowed from family and friends, if it is a lump sum offer. Don’t give names or other identifiers, unless they specifically ask.
If your financial statements do actually show that you have the cash available for a lump sum offer, then the offer amount will be more, as the formula to compute the offer amount will show.
Section VIII. Sign and date the offer.
Section IX. If you are not able to communicate with the IRS and have a friend or family member helping you, fill this part out.
Section X. For you power of attorney representative.
Section XI. Same as IX , unless you use two different people. Maybe you have an accountant friend who was willing to fill out the forms, but not willing to represent you, and a friend or family member who is helping you, will speak to the IRS for you. This is very dangerous to do. The person speaking to the IRS should be knowledgeable about the financial information. Then again, some people don’t have a choice!
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