June 19, 2012 by Jay Freeborne

I wanted to illustrate the BIG changes in the IRS Offer in Compromise rules by using a client of Washington Tax Service and to show what they qualified for as far as tax relief - before and after -- the law changes:

TAX DEBT: $1.7 million for 1040 taxes from 1997 thru 2009.  (Yes this is a lot of money :))

TAXPAYER'S FINANCIAL SITUATION:

Monthly income: $22983

Monthly expenses:

$1029 National standard - automatically given to taxpayer depending on amt. of people in household.
$1990 Housing - fully allowed for their county in Texas - (listed Housing Standards for Texas)
$488 Transportation expenses for two cars in the South (no major city - Transportation Standards - IRS)
$1400 Out of pocket medical expenses plus health insurance
$7640 Estimated taxes for federal including social security as client is self-employed
$250 Life insurance - term life policy - therefore fully allowable.

Total expenses $12797.00

Disposable income:  $10186.00
Client's Assets:  $12,340 --

OLD OFFER IN COMPROMISE:  $500,000 settlement

In the old offer formula you would multiply:

$10186 of disposable income by 48 months to come up with =  $488,928.00 add in their $12,340 of assets that would give you an Offer $501,268.  The best Offer he could do:  $501,268 to settle their debt of $1.7 million.  Bottomline - not really feasible.  Our staff negotiated a $4300 monthly installment agreement for the taxpayer.

NEW OFFER IN COMPROMISE: $134,572.00 settlement

In the new Offer formula you would multiply:

$10186 of disposable income by 12 months to come up with  = $122,232 add in their $12,340 of assets giving us an Offer of $134,572.00.  That is a much more attractive Offer.   When the rules changed I called the taxpayer and he is fully on board to do this Offer.  In the meantime, if he defaults his payment plan by the time the IRS collection process starts again - the Offer will be filed which automatically stops the collection process.

20% of the client's settlement will be required to start along with a $150 filing fee.  It will take about 5 months to process the Offer.  When the Offer is approved the client can pay the remaining 80% of the Offer all at once or in five payments over six months (roughly).

UPDATE: THIS CLIENT'S OFFER WAS ACCEPTED IN AUGUST 2013 FOR $59,000 - LOWER THAN PROJECTED!! SEE HERE FOR NARRATIVE: IRS Offer Accepted to settle $1.7 million debt !

Click ahead to read Part 5:  Part 5: Final Test...The Statute of Limitations.

If you want to read the other parts, here they are:

Part I Offer in Compromise 2012 Rule Changes
Part 2 OIC - rule changes, continued
Part 3 What are you Paying the IRS monthly? Try OIC.

How does your situation fit in the new Offer formula?  Call us at 1-888-282-4697 and we can hammer it out together.  Staff of Washington Tax Services

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