Drowning in tax debt? You may find relief via an “offer in compromise” — an IRS option that allows taxpayers to reduce outstanding tax debts.
But be warned: the rules are inflexible and messing up can be costly. So, it’s best to work with an attorney who has intimate knowledge of the program.
The IRS Does Compromise
The IRS wants taxpayers to devote all disposable income to pay off tax debts, but they understand that people have living expenses. Despite its Scrooge McDuck reputation, the IRS doesn’t force people to fork over every last cent.
However, the difference between what you and the agency consider to be “reasonable allowable living expenses” can be cavernous.
Spending Limits and Cash Flow
The IRS determines cash flow by calculating income minus allowable living expenses. Then that amount is multiplied by the number of months the government has left to collect the tax debt. The IRS is only able to collect tax debts that are less than 10 years old.
If the amount of the cash flow left after the calculations are performed is less than what the taxpayer owes, the offer will likely be approved.
The rub? The IRS’ thresholds for allowable living expenses are typically much less than what taxpayers actually spend.
Let’s use Cook County, Illinois as an example.
The IRS allows a two-person family living in Cook County, Illinois $2,092 per month for housing and utilities expenses. That figure is supposed to cover rent or mortgage, insurance, property taxes, maintenance and repair expenses, garbage collection, heating, water, electric, gas, residential phone service, cell phone service, Internet, and cable television. But the average rent for two-bedroom apartments in Chicago is around $2,047 (May 2017).
Certain expenses are not limited and counted in full, such as child support payments. And in certain cases, tax attorneys can secure variances for living expenses. For example, if a taxpayer has extraordinary expenses for the care of a special needs child, a variance may be possible. There are other things that might also prompt a lawyer to seek a variance from the standards, but petitioners need to provide evidence of their claims.
Making an Offer in Compromise
Before making an offer in compromise, taxpayers should first review the current living expense standards for their location. Then they should complete the cash flow analysis to determine an appropriate offer. By researching and conducting the proper analysis, it is likelier that a taxpayer will be successful with the offer.
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