An IRS Offer in Compromise or tax settlement allows you to settle whatever tax debts you might have for less than the full amount owed. This is a legitimate option if you cannot pay your full tax liability or if doing so would create a financial hardship. The IRS considers the following circumstances and facts when you file an Offer in Compromise: your ability to pay, your income, any expenses, and asset equity.
In order to be eligible for an Offer in Compromise, you must be current with all filing and payment requirements. There is an Offer in Compromise Pre-Qualifier questionnaire online which may be helpful in checking if you are eligible for this option. The IRS generally approves these offers when the amount offered is the most they could expect to collect in a reasonable amount of time. There are other rules and regulations surrounding the eligibility of taxpayers to file an Offer in Compromise, which are explained below.
Salability of Assets
Salability is defined in terms of liquidity, or the ability to convert property to cash or pay a liability quickly, or the ability to convert an asset into cash without losing principle. This conversion is not only specific to the term asset, but can also include business, business ownership interest, and security. When they evaluate a taxpayer’s assets, the IRS will determine the ability of the assets to be converted to cash to satisfy the federal tax liability. The IRS will also take into consideration certain economic factors which may affect marketability.
Current Assets: Cash and Cash Equivalents
Unfortunately, the IRS does not consider the payment of credit cards to be a necessary living expense, and it is important to keep this in mind while the IRS determines your ability to pay the federal tax owed. The IRS Form 433-A will require the taxpayer to list all lines of credit and bank issued credit cards and all account and balance information relating to those cards, partially due to the IRS encouraging taxpayers to pay their federal tax liabilities using a credit card because the card’s interest rate will be lower than the interest rate plus penalties the IRS charges. These penalties and assessments from the IRS make repaying the tax balance difficult, whereas putting the balance on a card just incurs the appropriate interest rate.
In the case of long-term assets such as stocks, bonds, real estate, and cash, these will be claimed on Form 433-A as well. You must calculate the total value of your interest, any loan balances, and the equity value (minus loan balance).
Monthly Cash Flow
Monthly cash flow is considered to be the ability of cash to come in and be expended on a monthly basis. Form 433-A requires all taxpayers to calculate a few things in regards to their monthly cash flow. First, taxpayers must calculate and outline all categories of monthly income, and specify whether they were generated as wages or through investment distribution, then calculate all categories of expenses which pertain to necessary living. To find the net difference, subtract total living expenses from total income, and you have an idea of your monthly cash flow specific to your income and living expenses.
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.