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Want to File an IRS Offer in Compromise? First, Review Available Equity.

December 30, 2016

Can I settle my tax debt for less that what I owe?

No doubt taxpayers are familiar with the TV or radio ads promoting the offer to settle tax debts for pennies on the dollar.

Those ads serve a purpose in educating taxpayers that a mechanism for reducing tax debt with the IRS exists. Formally, that mechanism is known as an IRS Offer in Compromise, and for the next five posts, we are going to discuss some of the most important parts of an IRS Offer in Compromise.

  • 1. Review Available Equity
  • 2. Review Income/Expenses
  • 3. The Application
  • 4. The Waiting Game/Continued Compliance
  • 5. Working With The Offer Examiner and/or Appeals Officer
  • Our firm’s exceptional 76.47% acceptance rate is due to the fact that we take the time to determine each taxpayer’s eligibility. For example, if a potential client exhibits a full ability to pay, even if over a long period of time, then filing an Offer in Compromise is a waste of time for everyone involved.

    The most important variable in evaluating the viability of an Offer in Compromise is available equity. Equity is simply the difference between the value of a particular asset and the liabilities on that same asset. As an example, Taxpayer A owns a car with a Kelly Blue Book value of $10,000. The remaining note on the vehicle is $5,000. Equity is $5,000.

    IRS Form 433-A (OIC): Section 3 Personal Asset Information lays out the assets the IRS evaluates for equity, and in our experience, the two most consequential are real estate and retirement plans.

    Real Estate

    IRS Internal Revenue Manual (09-30-2013) is the applicable section on valuing real estate, and it uses the term fair market value without fully defining it. Absent a recent appraisal, determining fair market value is incredibly tough. So long as a taxpayer avoids adding an intrinsic value to the property, that taxpayer will most likely be allowed the benefit of the doubt when listing a fair market value.

    Moreover, the IRS affords a quick sale value, which simply means they take a 20% discount on determined fair market value.

    Example 1. Taxpayer owns a home recently appraised at $250,000. The quick sale value is $200,000 ($250,000 x .8 = $200,000). Further, Taxpayer owes $220,000 on the home. Available equity is zero.

    Example 2. Taxpayer owns a home recently appraised at $350,000. The quick sale value is $280,000 ($350,000 x .8 = $280,000). Taxpayer owes $250,000 on the home. Available equity here is $30,000.

    Retirement Plans

    IRS Internal Revenue Manual (09-30-2013) is the applicable section on valuing equity in retirement plans. It is extremely important to review this section carefully as the equity assigned to a 401(k) varies greatly from pensions paid as monthly annuities such as a union pension or a plan that requires contributions such as FERS for government employees.

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