Discussion:What is "reasonable" for an OIC?
From TaxAlmanac
Discussion Forum Index --> Tax Questions --> What is "reasonable" for an OIC?
| 23 April 2007 | |
| My client owes about 70k to the IRS for 05 and 06 income taxes. The tax liability was created when he withdrew retirement funds to purchase a business that is now failing. He has no income and no equity. IRS collections has advised that he is a good candidate for OIC, but I don't have a sense for what is a reasonable offer. $1,000? $5,000? $10,000? Any feedback would be appreciated. | |
| 23 April 2007 | |
| An old rule of thumb I once used:
Take his monthly income and subtract his necessary monthly expenses. Take this number and multiply by 60 (five years of monthly payments) Multiply this number by 85%. Of course, the final offer should not be sitting in an account in the taxpayer's name. The IRS would want that money, and then an installment agreement set up based on his monthly discretionary income. Ideally, the offer would come from a gift from a relative or friend (funds the IRS would not have access to thru a levy). The offer would not typically come from a loan, either, as IRS would expect the taxpayer to get a loan, pay over these funds, and begin installment agreement. Note: These rules may have changed considerably from the last time I attempted an OIC on behalf of a client, because I generally advise clients against them (unless they fit the guidelines I have outlined), as they seem to be a monumental waste of time, and the IRS tends to give you the biggest runaround you will ever encounter. | |
| 23 April 2007 | |
| JD, The concept of reasonable for the amount of an offer isn't relevant. The rules are quite clear. I suggest that you read Pub. 656. It explains the methodology for determining the acceptable amount of an offer. -- Larry Hess, CPA, Albuquerque, NM - Talk to me | |
| 23 April 2007 | |
| Thanks for the responses. Perhaps I didn't use the correct terminology. My understanding is that the offer must equal or exceed the "reasonable collection potential". If the taxpayer has zero equity and zero income, what is the reasonable collection potential? I'll read Pub 656 and see if I can find out there... | |
| 23 April 2007 | |
| Part of the RCP is the average bank account balance for the most recent 3 months. I represented a client whose income analysis resulted in much the same as yours except for the bank balance. The offer was based on that. It was also important that my client clearly explained that the offer would be funded by borrowing from a friend. The IRS agreed and accepted the offer. -- Larry Hess, CPA, Albuquerque, NM - Talk to me | |
| 23 April 2007 | |
| Well, if there is no equity at all, and no disposable monthly income (but remember that the IRS uses standard expenses, not necessarily actual expenses), your minimum acceptable offer may be as low as $100. As a practical point, I would probably offer a $1,000 or so. The IRS will accept it if they agree with your financial analysis. Also, in considering the amount of proposed offer remember that under the new rules, you need to submit a 20% deposit for cash offers, or first installment payment for installment offers. | |
| 24 April 2007 | |
| I agree completely with the previous poster. My firm generally sets a floor of $1,000 for Offers when there are no assets and there is no ability to make monthly payments. The one exception was for a taxpayer where I personally funded an Offer of $250, which was ultimately accepted by Appeals after being turned down by the RO.
What I don't understand is blanket statements that Offers shouldn't be submitted. There is no question that many sleazy firms sell Offers as a way to separate unsuspecting taxpayers (well, non-taxpayers) from their money. However, when used properly by tax professionals that understand the Offer process, it's no more complicated than anything else we handle. | |
Taxguy1024 (talk|edits) said: | 25 April 2007 |
| According to Wikipedia, there was an Offer in Compromise submitted in 2006 for $1 that was accepted......so it CAN happen.........and if your client falls below a certain income level, there is no requirement to submit the $150 fee or the 20% payment.... | |
| 25 April 2007 | |
| Wikipedia, indeed!
I can tell you my own war story of the offer that was submitted for $100. The offer specialist's reaction was "you must be kidding." Credibility in dealing with the IRS is incredibly important. I live in the trenches. That's real life. Wikipedia is, well, someone's idea of the world as we'd like it to be. -- Larry Hess, CPA | Albuquerque, NM | Talk to me | |
| 26 April 2007 | |
| No offer can be rejected solely on the basis for being too little if it fits the facts & circumstances of the case. | |
| 26 April 2007 | |
| That may be, Steve, but in the case I was referring to the offer amount set a tone of credibility that affected the IRS employee's attitude toward my client. It wasn't a professional way for them to deal with the case, but it did happen and was the real world. I try to get my offer clients to find at least $1,000 for their offer. -- Larry Hess, CPA | Albuquerque, NM | Talk to me | |
| 26 April 2007 | |
| The only OIC I ever did was for a woman whose ex-husband never filed a tax return. He told her he had filed them, they owed nothing and she left it at that. She got a surprise letter one day from the IRS asking for around $6,000. We claimed innocent spouse and she had only $300 to her name. At first they rejected the offer and wanted all of it or where they could find the ex-husband. After I told my client to hand them her ex-husband on a platter, they took the $300, found the ex-husband. I think they are still collecting from him if they didn't throw him in jail. | |
