An offer in compromise (OIC) is designed to settle the taxpayer’s debt for substantially less than he or she owes. The purpose behind the OIC is to bring delinquent taxpayers back into good standing, while providing the IRS an opportunity to collect as much outstanding tax revenue as it can. If you are unable to pay your total tax debt, an offer in compromise may be a great option; however, it is not for everyone.
Calculating the Offer in Compromise
To determine the acceptable minimum offer amount, the IRS will look at the taxpayer’s income and available assets, and compare it to their monthly expenses and other secured debts; however, not all expenses qualify. For example, non-secured debt, such as credit card debt, will not be taken into account when calculating your offer. In addition, the IRS imposes a cap on qualified expenses, such as housing and transportation costs, to limit the amount you can claim, even if your actual expenses are much greater.
Further, the value of any assets the taxpayer currently has, such as a home, car, 401K, or checking account, will be automatically calculated into the minimum offer amount. Consequently, those who have a valuation of assets exceeding their tax liability are not good candidates for an offer in compromise, since the IRS will deem the taxpayer capable of paying the entire liability. This does not mean, however, that one should liquidate their assets prior to submitting an offer. The IRS may consider these recently sold assets to be “dissipated assets,” which could have an adverse effect on the final offer amount.
What is a Dissipated Asset?
Dissipated assets are anything of value that you had and subsequently sold, which could have satisfied your tax liability. For example, the sale of a business or car could be a dissipated asset. If the proceeds from the sale were spent on something other than your tax liability, and are no longer available to you, the IRS may add the value of the dissipated assets to your minimum offer amount.
Dissipated assets and their treatment can be difficult for many taxpayers to understand. However, treatment of assets is an important factor when the IRS determines the viability of an offer in compromise. Therefore, one mischaracterized asset, or one that is not accompanied by proper explanation can cause an offer in compromise to be rejected.
Calculating the offer in compromise is a complex process and requires professional assistance. It is important to seek out a qualified representative licensed to practice before the IRS, such as an attorney or certified public accountant. These experienced professionals are familiar with IRS regulations and can greatly improve the likelihood that your offer will be accepted.
If you have any questions or if we can further assist you, please contact our San Diego Offer in Compromise attorneys.