Offer in Compromise based on Doubt as to Collectability
There are three main types of offers in compromise that you can submit to the IRS. The most common is the offer in compromise based on doubt as to collectability. The essence of this type of offer in compromise is this: you are telling the IRS that you agree that you are liable for the taxes, interest and penalties that have accrued against you, but you can’t afford to pay them. Since you cannot afford to pay the taxes in full you are requesting that the IRS take a reduced amount for this. No doubt you have seen the late night television commercials stating that they can help you settle your taxes for “pennies on the dollar.” They make it sound so easy. So automatic. My friends, it is not always that easy or automatic. It all depends on your individual financial situation at the time you file your offer in compromise. When I say your “financial situation” what I am talking about is your current income, your monthly expenses, and the equity that you have in the assets that you own. Figuring out your income is usually the easy part. However, I know that many of you are self-employed but that you do not keep good records and it is hard to determine what you actually earn. In this situation it takes a lot more work to determine what to put in this line on the IRS forms. BUT, you have to do this work – for a couple of reasons. First, it is just good business for you to keep good records and stay on top of your company’s finances. How else do you know how well your company is doing? Second, the IRS is going to require you to prove to them what you say your income is. They do not simply just take your word for it. If you work for a company, then it is much easier to determine your income. Simply look at your most recent paystub and determine what your average monthly income is.
Now, where the IRS really gets you is on the expense side of the equation. Most people do not live extravagant lifestyles. They are simply trying to get by from one month to the next or maybe even one week to the next. You have a mortgage or rent payment, the usual utilities like power, water, gas, cable and telephone, a car or two, some monthly prescriptions, and so on. Here’s the catch: for many of the expenses you will list on your financial statement the IRS has “national standards” that they will allow as your monthly expenses. The problem with these national standards is that they are lower than what the average person spends on these monthly expenses and they do not changes very frequently so they will not take into consideration things like gasoline that costs $4 per gallon. So if, for example, you have a family of three and your mortgage payment is $1,500 per month, the IRS may only allow $1,100 per month as the national standard for your area. So right off the bat you are $400 in the hole. Most Americans do not know about these national standards until it is too late when dealing with the IRS and they have already lost their fight for an offer in compromise. The IRS will require that you provide lot of information about your monthly expenses like receipts, bills, invoices, mortgage statements, bank statements, etc. The process of gathering the material to include with your financial declaration can often take days if you are not of the organizational variety.
Finally, the IRS looks at your net realizable equity in the assets that you own. Basically, what this means is that you have to come up with the cash value of the assets that you own. But the IRS does not use the original retail price for your assets, but rather a discounted price similar to what you would get if you HAD to sell your assets in a very short time. That is good news. And just like before, you will have to provide documentation supporting your valuation of your assets such as Kelly blue book statements for your cars, a recent appraisal for your house if you have one or some other way to value the real estate, appraisals for jewelry, etc.
After you have provided this information the IRS will closely scrutinize every line. Remember, most IRS offer examiners are very nice and pleasant to deal with but they are not on your side. They are trying to find a way for you to pay a larger amount in your offer in compromise or for your offer to be rejected altogether.