What is the "Statute of limitations" you might ask? Well - IRS liabilities pretty much last for TEN years from the date the tax was assessed. A tax liability for 2002, for example, was likely created in 2003 when the return was filed. Therefore the debt would expire in 2013 - ten years from that 2003 date. (IRS transcripts will tell the story and as well might show events that would extend the statute like an older rejected Offer or bankruptcy).
So let's use an example to illustrate this law:
Taxpayer owes $175,000.00. She owes this tax for tax years 2004 2005 2006 and 2011.
We have calculated that her monthly disposable income is $1000.00 after factoring in IRS allowable expenditures. Based on the new IRS formula, you would multiply this $1000.00 by 12 months giving you a total of $12,000.00. Add in her assets of $5,000 and you have theoretically an Offer of $17,000.
However we need to double check this against the statute of limitations of the most recent year of taxes that she owes. Her 2011 tax return was processed in May of 2012. She owed $17,000 for the year.
So from today: November 19, 2012, she has 5 months left in the first year for it to expire and add 9 more years or 108 months. So, that last liability has 113 months left before it expires. Multiply $1000 of monthly disposable income by 113 months and you have $113,000 -- BELOW WHAT SHE OWES - $175,000...
So she qualifies for her Offer!!! We would submit that $17,000 Offer as soon as we could if she could come up with the money. This is a test we have to use for anyone who has disposable income for calcuating the Offer.
Now if this same person, had $2000 monthly disposable (qualifying for an Offer of $29,000.) She would disqualify herself as he disposable income would pay off the IRS $2000 x 113 or $226,000 within the statute!
Click ahead to Part 6 : Part 6: More About Collection Statute and its Impact on the Offer
You can read our 6 part series about the Offer in Compromise :
Part I: Breaking News: OIC Rule Changes
Part III: Payment = Offer Calculator
Need more clarity about the Offer program? Call us at 1-888-282-4697 or email us a description of your tax issue and we'll contact you. Staff of Washington Tax Services.