The IRS’ Fresh Start Offer in Compromise program is the best tool an IRS debtor has in finding tax relief. While tax debt can be discharged in bankruptcy, and penalties can be removed through the abatement process, the OIC has the best benefit for the least cost. It was built solely for the purpose of bringing relief to tax debtors that could not afford to ever pay off their tax debt. Thus, saving the taxpayer stress and allowing necessary financial resources to provide for themselves and their families. It also helps the IRS preserve its own resources. By not exhausting them on persons that cannot ever pay, and exchanging a historical tax debtor with a good paying compliant tax person for the next five years. So now that we know this is the best program, how do you know if you qualify for the IRS Fresh Start Program? Let’s break that down here:
The Equation to Qualify
As we discussed in previous articles, the offer in compromise is built on a financial equation:
DISPOSABLE MONTHLY INCOME (MULTIPLIER) + AVAILABLE EQUITY IN ASSETS = OFFER SETTLEMENT AMOUNT.
In helping understand this equation better, let’s break it down into its parts. The most simplest is the multiplier. The multiplier is either 12 or 24 depending on which offer payoff you are applying for. The most common we see is the 12 option. This multiplier is one that was updated in 2011 with the release of the Fresh Start initiative. Reducing it allowed a lot more people to qualify.
DISPOSABLE MONTHLY INCOME
After identifying the appropriate multiplier, we need to understand the disposable monthly income. This is broken into two parts, income and expenses. The income is all income from all sources in the household. The IRS is not asking about taxable income. It is not asking just about your income and ignoring others in the home. They want to know how you pay for expenses. They will check this income against your last year’s reported income as well as against your bank statements and pay stubs to find its accuracy.
After the income is found, we head to expenses. This is the fun part. Each household expense is unique to the amount of people in the home, the county where that home is, and the age of its residents. There are main categories such as food and clothing, transportation, housing, and medical. The IRS allotted these national standard expenses based upon economic data that is updated in the spring every year. Even the bankruptcy code follows a similar pattern. A 25 year old with two kids in San Francisco has different expenses compared to a 65 year old living in Alabama. The goal to see if you qualify for this program is to identify your income accurately and then maximize your expenses to their reality. This shows the IRS that there is little to no disposable monthly income, and therefore no ability to pay the IRS.
Available Equity in Assets
The last piece of the puzzle is equity in assets. While the IRS may agree that you have no disposable monthly income, they still might not be willing to grant a settlement because of equity. The problems we normally see with equity arises with non resident real property or large investments. If equity is shown available is more than your tax liability, the IRS can instead grant a currently not collectible on the debt. However, if there is absolutely no equity available, then the offer is a step away.
Showing the IRS that there is no ability to pay the tax debt before it expires is the rule of thumb in achieving an offer in compromise. Understanding income, the appropriate expenses, and identifying available equity is key. If this equation shows no ability to pay, then it is time to apply for the offer with the IRS. How you get there is just the next step. Contact us at Tax Debt Services at 800-822-4122 and we can determine if you qualify through our free consultation. Or you can go online and complete our Do I Qualify form at https://taxdebtservices.com/doiqualify/.