FAQ

An Offer-in-Compromise is an increasingly popular settlement program used by the IRS. It is a program that focuses on a taxpayer's collectability rather than on his liability.

What is an Offer-in-Compromise?

An Offer-in-Compromise is an increasingly popular settlement program used by the IRS. It is a program that focuses on a taxpayer's collectability rather than on his liability.

In other words, regardless of how much a taxpayer actually owes, if he offers the IRS more than the Service could otherwise reasonably collect through conventional collection efforts, the IRS will fully compromise the existing tax debt.

How much of a savings can I realize?

This is a frequently asked, but often misleading question. In the Offer program, the focus is on collectability rather than liability. While a broad range of settlement could be between 5% and 50% of the existing tax liability, the Service is not primarily concerned with the size of the debt, but rather with the taxpayer's ability to pay it during the short term future.

In the Offer program, the focus is on collectability rather than liability. While a broad range of settlement could be between 5% and 50% of the existing tax liability, the Service is not primarily concerned with the size of the debt, but rather with the taxpayer's ability to pay it during the short term future.

Am I a good candidate for an Offer?

In order to properly answer this question, a preliminary financial analysis is necessary.

The Service will analyze the liable taxpayer's net equity in assets as well as a discounted stream of future disposable income for up to the next five years. The Service will use various techniques to value the taxpayer's net equity in assets, and it will examine a monthly budget to determine net disposable income.

Once gross monthly income is reduced by the Service's allowable expenses, a general rule is to multiply the difference by fifty in order to calculate the income portion of the required Offer amount.

These two components (net equity in assets plus the discounted stream of future disposable income) equals a taxpayer's Reasonable Collection Potential. If the Service is being offered for more than what is otherwise available through reasonable collection, it should accept the Offer.

What if my tax debt is only between $5,000 and $20,000?

If your tax debt is large enough to warrant some sort of action, but not large enough to justify the expense of an attorney, we encourage the use of our Do-It-Yourself Self-Help Manual. It is designed for this kind of taxpayer who wishes to settle his case, but whose tax debt is still relatively manageable.

What is the timetable for the Offer and what funds can I use to pay it?

As for the timetable, a lot depends on the Offer Specialist assigned to the case. Our rule of thumb is that the time needed from the initial attorney consultation through the actual payment of the Offer is approximately one year.

Some successful Offers are funded by funds within control of the taxpayer (e.g. a property refinance). However, in most successful Offers, the funds are borrowed from a third party. In this fashion, the taxpayer reduces his overall debt and trades the IRS for a friendlier creditor.

When it comes to a complicated valuation analysis or a sophisticated expense claim in the financial statements, a thorough knowledge of the Internal Revenue Code, Treasury Regulations, Internal Revenue Manual, as well as IRS standard operating procedures are vital to a successful Offer.

Do I really need an attorney to negotiate an Offer?

Do you really need an attorney to file a standard lawsuit? Do you really need a doctor to perform a physical examination? Probably not, but the expertise they bring to the situation should only help you.

When it comes to a complicated valuation analysis or a sophisticated expense claim in the financial statements, a thorough knowledge of the Internal Revenue Code, Treasury Regulations, Internal Revenue Manual, as well as IRS standard operating procedure are vital to a successful Offer.

In this fashion, a good attorney can not only save you money, but free you from the headache of a one-year emotional negotiation process with the IRS.

Remember that because of the valuation of disposable future income and overall collection potential, one dollar of monthly disposable income amounts to a fifty dollar increase in the required Offer amount. Therefore a complete knowledge of allowable expenses is extremely beneficial.

Can bankruptcy be used to discharge federal tax debt?

Bankruptcy can be used to discharge federal tax debt. However, there are three 'chapters' - 7, 11, and 13 - within the bankruptcy code, and many different types of taxes (personal, corporate, payroll, trust fund, etc.) which could create a liability.

The short answer is yes. However, there are three "chapters" - 7, 11, and 13 - within the bankruptcy code, and many different types of taxes (personal, corporate, payroll, trust fund, etc.) which could create a liability.

The rules for each chapter and type of tax differ, but some type of bankruptcy can generally be an effective option for certain tax debts. Even many general practitioner lawyers and accountants are unaware of the many options available, and it is therefore more important to consult with an attorney who specializes in this field.

Should I make monthly payments to the IRS?

Long term payment plans - called Installment Agreements - are rarely the first option to be considered. This is true because in many cases the monthly payment does not keep up with the growing interest and penalties. In such a case, the taxpayer keeps paying but his debt keeps growing.

Sometimes it is the only possible solution, but the possibilities of an Offer and/or bankruptcy should at least be considered before such an Installment Agreement is finalized.

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