Apr 10, 2023
We’ve all seen the commercials… there’s usually a couple standing in front of a home with a nicely manicured lawn touting the amazing deal a tax debt resolution company negotiated on their behalf: "We owed the IRS $200,000, and after hiring ABC Tax Debt Resolution Company, they were able to negotiate our debt down to $500.00!"
These advertisements do not openly tell you that the taxpayers have three dependents, the husband works a second job to help make ends meet, and they don’t own that beautiful home they are standing in front of. So how can you assess for yourself or your client whether an Offer in Compromise will be a good resolution? Let me share with you what 23+ years in the tax debt resolution industry have taught me about Offer in Compromise resolutions and who would be a great candidate for these settlement programs.
For an Offer in Compromise, the IRS and States generally look at a few key financial factors of the taxpayer:
First, remember that the tax agencies have a job: to collect any past-due taxes owed as quickly as possible. The more money the taxpayer makes, the more the IRS or State will want to be applied to the tax debt. Income sources included for consideration are W-2 wages, pensions, Social Security, side-project income from a sole proprietor business, funds received through an inheritance, and more.
Though the taxpayer’s income is one part of the equation, it wouldn’t be fair if the IRS and State didn’t acknowledge that some/most/all of that income is needed to tend to the necessary expenses for the health and welfare of the taxpayer and any dependents. However, (here comes a big asterisk) the expenses are limited to figures deemed “appropriate” for the necessary obligations.
To calculate what is considered “appropriate,” the IRS or State will consider the county the taxpayer resides in, the number of members of the household, the number of vehicles necessary to earn the income considered for the compromise/settlement, and the age of the members of the household. The IRS refers to these expense figures as “Collection Financial Standards,” which are derived from databases of the U.S. Census Bureau, the American Community Survey, the Bureau of Labor Statistics Consumer Expenditure Survey, and local County and State resources; most States will recognize this data as acceptable as well and can be found here: https://www.irs.gov/businesses/small-businesses-self-employed/collection-financial-standards.
Unfortunately for the taxpayer, many common expenses aren’t deemed “necessary” in the eyes of the tax agencies: donations to churches or charities, private school expenses for dependents, braces or eyesight correction surgeries, plastic surgery, expenses for pets, and more. There are always exceptions to the rule, such as “we need to pay for our child’s eyesight correction surgery because, without it, she would lose the ability to see.” Though the IRS and State seek the repayment of every penny possible, they aren’t completely unreasonable.
For every dollar above and beyond the expenses deemed acceptable/necessary, the IRS or State will consider another dollar they can expect the taxpayer to pay. How that dollar is added to the settlement figure depends on the specific settlement program you need to address. For an individual taxpayer, the IRS, for example, will calculate that dollar in one of two ways: a.) if the taxpayer will pay the offer amount in five or fewer payments within five months of acceptance, the dollar is multiplied by 12, or b.) if the taxpayer will pay the offer amount in six to twenty-four months following approval, then the dollar is multiplied by 24. In Maryland, for example, the dollar is not tied to an equation, but the taxpayer is expected to make a “reasonable” offer to settle the past due taxes owed.
The other key part of the answer to the “am I an Offer in Compromise candidate?” question is the amount of equity in assets acquired by the taxpayer. Assets include but are not limited to real estate, vehicles, boats, recreational vehicles, valuable collections such as coins, stamps, guns, or jewelry, whole life insurance policies, shares in a business, any assets liquidated while the tax debt was accruing, etc. For most of these, the tax agencies will recognize a liquidated fair market value, and any priority loans outstanding on these assets will be considered.
To identify a “fair” amount to propose as the settlement figure, consideration has to be made for the net income after allowable expenses and the equity in assets held by the taxpayer. And keep in mind that the same playing field typically applies to businesses that are seeking a settlement on a tax debt… they just typically have more hoops to jump through, and personal assessments for any trust taxes come into play (for more information on trust taxes, see our blog released last week!).
If you or your client may qualify for an Offer in Compromise to settle a past due tax debt, yet this all feels overwhelming, contact the team at Golden Lion Tax Solutions. Over the last two decades, we have successfully negotiated hundreds of compromises and settlements for our clients with the IRS and State tax agencies. We have the knowledge and experience to correctly identify if a compromise or settlement is in the taxpayer’s best interest and if it is a proposal that will be considered by the tax agency(ies) involved.
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Your future and your family deserve the right protection. Golden Lion Tax Solutions will be your advisor and confidant throughout the entire journey. We guarantee to offer you or your business best-case solutions for your tax debt. We are by your side every step of the way. Start now and get your life back.
For help with your tax debts, email email@example.com or call 833-LION-TAX (833-546-6829)
Disclaimer: There are requirements that must be satisfied in order to qualify for some of the tax solutions we discuss on our website. Not all of our services will be suitable for every client. Golden Lion Tax Solutions is here to help you find the most appropriate solution to fit your situation.