Tax Debt Offer In Compromise

[dingdong]

One of my cousins has an approx 10,000.00 personal IRS tax assesment that she cannot pay.

I was looking over the IRS booklet on OIC. I ran the numbers for her, and it appears, with using actual expenses that are under the IRS standards for collection that her MDI is 0. The expense calculations were very conservative, no added "extra" deductions, just basic stuff, Rent, Utilities, Food, Health Insurance. All easily verfiable through statements. If she used the national IRS standards for collection, she would be extremely negative. Just using actual, she is under by a few hundred every month. SHe has been borrowing money from her mom to make it.

Is it best to use the IRS standards for food/Misc? I read that using the stndards accepted by the IRS is basically not questioned and no supporting documentation is needed ( ie receipts for food expenses , etc)?


She has no assets,lives paycheck to paycheck. BK isn't an option as she filed last year. She has no CC, Car isn't worth much maybe 4000.00, and I believe it is exempt anyway.

She has been making less money every year, rent is high here in Cal. Future income increase is not in her future.

Do you think with a MDI of 0, that an offer on 1000.00 payable at 100.00 per month would be accepted or rejected by the IRS?

It would be more than could be collected by the IRS, over the time period, there would be absolutely no assets she could "quick sale" for payment. She lost her home to FC over a year ago.

Would the IRS be more likely to put her in CNC status or perhaps accept the offer?

She currently makes below the 250% poverty level and would even qualify for the processing fee waiver.

Thanks for any help.

DD

[HHM]

OIC's are a totally different ballgame from BK.

1. Not only are IRS expense standards desirable in an OIC, they are required.
2. There is only 1 exemption when it comes to IRS debt and OIC's, that is household furnishing, which is just over 7,000 last I checked. Nothing else is exempt, not cars, not home equity, not IRA's, not 401K, not social security, etc.

An OIC is not a number you simply "throw out". If you read the publication, it is a calculation. Also, she must legally qualify. The other issue at stake is the "Reasonable Collection Potential". You must not only prove that she cannot pay the debt now, but for the length of the statute of limitations (which is 10 years from teh date of assessment).
OIC's are computed by, equity in assets + MDI x48 (or 60 depending on which OIC payment option you select).

If she as $4,000 in vehicle equity, here OIC will be $4,000.

You can always try an OIC (realize the IRS accepts only about 25%), but realize that an OIC tolls the running of the statute of limitations and the timelines for discharging in BK, this is important because the IRS can take up to 24 months to accept or reject and OIC. She may want to try for Non-collectable status, NCS is temporary, but can be renewed, and it doesn't tolll the SOL.

[dingdong]

Thanks for the reply. I was hoping you would.

So given the 4000.00 in equity in the vehicle, and 0 MDI, an offer of 4000.00would have a decent chance of getting accepted?

She teaches in a special needs pre school. Her income has remained pretty steady over the last 10 years or so, crappy but steady.

The funding for the school may be eliminated in the Cal budget cuts, so she may even be facing job loss or reduction in earnings.


Would the 20% "quick sale" deduction rule apply to the equity in her car?

So technically on offer of 3200 may be accepted?

[HHM]

Yes, use quick sale value.

Incidentally, if your friend's income has been steady, how did she suddently get hit with a $10K tax bill?

All things considered, if there are no other issues, she would stand a a good chance of getting a $3,200 OIC accepted.

Unless someone was willing to give her the money as a gift, I would probably have her go CNC.

[dingdong]

Another question.

If she tries for Currently Non Collectible status, will she be under constant scrutiny by the IRS and be required to provide continued documentation of expenses?

The non-tolling of SOL may be a benefit, but if she could borrow the money, she would essentially be done with it and not have it hang over her head.


We are all (familu) trying to "pitch in" and loan her the money to come up with an offer just to try and help.

If the OIC is rejected and based on form 433, she has no DMI, does she automatically get placed in status 53?

[dingdong]

As for the tax bill, I think she screwed up on a capital gains issue when she sold a condo before buying her last house. Didn't calculate the basis correctly? She hasn't really elaborated, and I haven't asked, but she said it had to do with the condo sale from a few years back. She just got the notice from the IRS a couple of days ago.

[HHM]

The IRS has the right to review CNC status every 18-24 months. So, no, she won't be under constant scrutiny. Also, so long as her tax returns stay consistant, she won't get flagged that way. I have seen self employed business people with good incomes stay in CNC for years.

If the OIC is rejected, she won't automatically be placed in CNC, she would need to request it once her account was placed back in collections. Note, if the OIC is rejected, it can be appealed.

If she has to "borrow" the money, then she should go CNC, if someone were willing to "give" her the money, then try the OIC. But that is more a practical concern than a legal concern.

[dingdong]

Thanks, I really appreciate the guidance and will pass the info on to her.

DD

[dingdong]

HHM,

After going over the 433 budget calculations with my cousin, if she uses the national standards for her family size for Food/Household/Misc, she will have a huge deficit in her MDI.

Will this raise a red flag with the IRS? In this situation, would it be better to use actual figures or at least drop the amount down by a couple hundred dollars? She lives fairly frugally, basically because she has to, but if she uses the IRS standards, she will have a negative MDI of about 800.00.

Her mom , helps her out a bit when she needs help, but I am worried that the large negative MDI may be a problem.

Is it best to get the MDI close to 0 or just a few hundred in the negative?

Thanks!

DD

[HHM]

For the OIC, use the IRS standards. For CNC, use actual numbers.

[dingdong]

Thanks so much!

[LuciluS]

Hey Dingdong:

Question. Possible someone could take a look at her tax return for that year or is it past the timeline (I need to brush up on the dates LOL!) to amend her tax return for that year?

Seems to me, that might be easier as you say her income hasn't fluctuated.
Surely, her Cost Basis less what she sold her condo/home would cause a $10,000 capital gain?

Just a thought.

Luci

[dingdong]

I am not sure. I don't really know the exact particulars of the tax issue. I do know she bought the condo for next to nothing, and then when she was looking for a new house and sold the condo she made quite a bit of money on it because the market was doing well then. She mentioned something about screwing up on the basis and Capital Gains.

I didn't really want to pry, I was just helping her with the OIC as she can't afford a tax attorney or EA.

She received a statement that they were going after assets, which she doesn't really have, but I am sure they will go after her wages.

Hopefully this will fix it.

Who knows?

Thanks for the input. I am not sure if she can amend or not, but I will suggest it to her.

I just think she royally screwed up on calculating basis.

She is not the sharpest knife in the drawer! ( ooh,hope she doesn't read our forum!!

Thanks again!

DD

[LuciluS]

Dingdong:

Okay.

DH says his mom is not the brightest candle on the birthday cake. She missed her flight because American changed the gate # in O'hare, Chicago, IL after visiting with us in AR. She called DH crying.

He was on the phone with American & told them the birthday cake & that she is 71 yrs. old, as I was researching flights. It's closer for her to fly in and out of Cincinnati airport, but twice the cost as Indianapolis airport & sometimes the flight leaves INDY & stops in Cincinnati for another connection.

Her bags were going to INDY. No flights going to Indy that night, but there was one going to Cinn. So DH convinced them to put her on that plane & he called our Pastor who picked her up at midnight. If DH hadn't got involved she would have spent the night in Chicago Airport.

No more of that. I book her flights and request Wheelchair Assistance

Hope you are able to help your cousin.

Luci