I represent taxpayers in Gainesville and the state of Florida who have tax issues with the IRS and Florida Department of Revenue. The IRS Offer-in-Compromise is an agreement to clear a tax debt for less than its face value. This is the idea behind “pennies on the dollar” payoff that you see on TV ads by national firms offering to clear tax debts.
Just owing money to the IRS does not make you eligible to submit an Offer-in-Compromise. Before you waste your time and money making an offer, check the following items:
- You must be in compliance. This means that all your tax returns have been filed and the current year withholding, and estimated tax payments have been made. The IRS does not want to waste time considering an offer if the debt is just going to continue to pile up.
- You must not have the ability to full-pay within the time remaining on the Statute of Limitations. How is this determined? It’s a question of math using a formula called the RCP for “Reasonable Collection Potential”. Basically, you need to calculate the equity in currently owned assets and add to that number the future expected earnings minus what the IRS calls “Allowable Expenses”. The allowable expenses are mostly based on tables for what is considered reasonable living costs.
Knowing the RCP formula allows a taxpayer to do some strategic planning to get the best outcome. You could for example get a life insurance policy and subtract the premiums from your future earnings number under the formula. Another planning idea is to get rid of your old but paid for clunker car with its high repair costs and replace it with a deductible car payment.
If you can show that you are in compliance and that you don’t have the potential to full-pay, an Offer-in-Compromise becomes a viable option. The amount you offer must be in the area of the amount calculated with the RCP formula. Generally, the IRS requires that a check for 20% of the offer price be included with the offer plus the Offer fee of $186. If the offer is accepted, the balance is due within the next five months.
If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email email@example.com.
Jim Payne, CPA
Cell (352) 317-5692
Office (352) 376-9401
Fax (352) 376-9440