The Internal Revenue Service’s (IRS) acknowledges that some taxpayers simply cannot meet their federal tax obligations. In other words, the taxpayer’s net assets and income less living expenses does not permit the taxpayer to pay back the IRS in full. In such situations, the IRS may be receptive to an Offer in Compromise, or an Offer to reduce the total amount of taxes due the IRS. Any taxpayer that the IRS deems capable of paying their tax obligations either in full at present or by way of a payment plan based upon earnings will generally be ineligible for an Offer in Compromise. Offers in Compromise can be offered on three bases one of which is where there is a doubt as to collectability based on the taxpayer’s financial situation and ability to pay. Such Offers in Compromise are offered based on the IRS’ calculation of a taxpayer’s future income.
A taxpayer’s future income is the “estimate of the taxpayer’s ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.” Internal Revenue Service, Internal Revenue Manual, 5.8.5.18 (10-22-2010) Future Income, available at https://www.irs.gov/irm/part5/irm_05-008-005.html#d0e1176. In making this future income determination, the IRS will take the current employment situation of the taxpayer into account. Thus, an unemployed or underemployed individual would be more likely to be offered an Offer in Compromise. On the other hand, the prospect of future employment, if relatively certain, is also likely to be taken into account. For example, a seasonal worker that was unemployed during the winter months, the future earnings in summer months would be taken into account.
In addition to earning power, other factors including age, health, marital status, number and age of dependents, level of education or occupation and work experience will be taken into account in the future income calculation.
Upon determining the future income of a taxpayer, the IRS will determine whether an Offer in Compromise will be granted, which is based upon the taxpayer’s reasonable collection potential, i.e. likelihood that the taxpayer will pay. Generally speaking the IRS will not accept Offers in Compromise where the amount offered is less than the reasonable collection potential associated with the taxpayer.
To learn more about how a taxpayer’s future income is calculated for pursuant to Offers in Compromise based on a doubt as to collectability, contact an experienced tax attorney with an understanding of the federal tax law.
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Please keep in mind the information and advice presented in this blog is not intended to be used as formal legal advice. Contact a tax professional for personalized tax advice pertaining to your specific situation. While we try and answer all parts of the question when we write our blogs, sometimes there may be some left unanswered. If you have any questions about your problems with the IRS, SBOE, FTB, or BOE, or tax law in general, call RJS Law at (619) 595-1655.
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