By Ralph Nelson, EA, Kenny Kim, EA, MD
An offer-in-compromise (OIC) is an agreement between a taxpayer and the IRS to settle their tax debt for less than what is owed. Financial Harmony Tax Resolution LLC specializes in submitting OICs for local taxpayers in the San Francisco Bay Area. And in doing so, we have noticed that many taxpayers have misconceptions about the OIC.
There's no secret to an Offer-in-Compromise.
The offer amount is based on your ability to pay, taking into consideration your income, expenses, and assets.
The IRS OIC program is based on a calculation known as "Reasonable Collection Potential," or RCP. Your RCP must be "reasonable", and it must also be in the government's best interest. The RCP is based on two parts: money leftover at the end of the month, and your assets.
The first part of the RCP is your income minus allowable expenses. This is where artistry enters the picture. The IRS will not allow a deduction for your Maserati, for example. It is critical to filing an OIC that only the allowable expenses are deducted to arrive at the amount leftover at the end of the month. This amount is added to the assets to determine your offer.
Also, to qualify for an OIC, equity in the taxpayer's assets must be included in the offer.
Some taxpayers believe that if they cannot tap the equity in the assets, then the equity is not included in the offer. This is not the case. It's not a question of whether the taxpayer can get to it; rather, it's a question of how much equity the taxpayer possesses. The IRS will want whatever the taxpayer has as part of an offer to settle the tax debt. This could include property, money, or other assets. If the taxpayer cannot come up with the money, an OIC will unlikely work.
Here are a few strategies to increase the chances of getting the OIC accepted.
Avoid spending money on items that could be seen as excessive and unnecessary.
Avoid taking your family on a costly vacation.
Make sure there are no new tax liabilities.
Before you file a case, you should consult with a tax resolution specialist to strategize to increase the chance of offer acceptance.
If you have any questions about the OIC or other IRS tax issues in the Bay Area, please feel free to contact us at (510) 828-6215 (Ralph); (341) 766-1247 (Kenny) or by checking out our website, www.financial-harmony.com