Friday, June 26, 2009

Pennies on the Dollar?

The Truth about an Offer in Compromise...

According to the IRS an Offer in Compromise (OIC) is “an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement”.

The IRS goes on to state that “in most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses”.

There is a lot of talk about Offers in Compromise and many tax resolution companies have been successful gaining clients by advertising, “pennies on the dollar” by settling through the Offer in Compromise program. The IRS warns taxpayers to beware of these claims as I've posted in a previous blog below.

The reality is that over 75% of OICs are rejected each year by the IRS. Part of the reason for this is that the reasonable collection potential or RCP, is not at all what most people would consider “reasonable”.

The IRS sets a standard of living for the county in which you live. For example, they may set a standard of $950 for housing and utilities for your county. If your housing and utilities cost $1100, the IRS will accuse you of living above the standards, spending excess money so that you can live a lavish lifestyle. In the eyes of the IRS, that $150 over the standard that you’re spending should be going to pay off your tax liability. Of course it doesn’t make sense to you because you know that you’re not living a lavish lifestyle, and that if you were in fact only spending $950 for housing and utilities that you’d be living in a low-income, dangerous neighborhood with drug attics and high crime. This doesn’t matter to the IRS though, because their only goal is to collect from you what is theirs.

Besides this, there are a number of other things that can disqualify you from getting an OIC approved. Many clients I’ve spoken to, with the recent changes in the economy, have become unemployed and want to try to settle their tax liability with an OIC. The problem in many cases is that if an individual has a decent education and had a good paying job a year ago and has the future potential to get another good paying job, it wouldn’t make sense for the IRS to settle with that person. If they settle with him or her just because the person has been unemployed the past year, and then in another few months that person finds a new job and begins making decent money, the IRS is out of luck because they’ve already settled the debt! And believe me, they’re much more intelligent and cautious with granting OICs than to make that mistake.

So you might be wondering who is a good candidate for an Offer in Compromise? An ideal candidate is someone who either doesn’t have any income or doesn’t have an income beyond what is necessary to cover the basic “standard” living expenses set by the IRS. This person would not have any assets or any accessible equity. Their income in the past several years should not be significantly higher than what it presently is, nor should they have a reasonable potential to begin making more money in the future. In many cases an ideal OIC candidate is either disabled or retired so that they’re not in a position where they could begin making more money sometime in the future.

The IRS will be very thorough in investigating all of these things and more before granting an OIC. Any tax resolution company should be equally thorough before offering this service to a client. Effectur Inc is the only tax resolution company that offers a money back guarantee on its fee to file an OIC for a client.

The following link to the IRS website provides more information on the three types of OICs as well as payment options available to those whose requests are accepted.,,id=104593,00.html

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