We recently submitted an Offer in compromise for a Boca Raton taxpayer and were able to settle his back taxes of $165,000 for only $13,200, a savings of 92%.
The offer in compromise program allows qualifying taxpayers to settle their back tax debt for less than what they owe and thus provide them with a fresh start. Sometimes we find that taxpayers are under a misconception that you can simply negotiate a settlement with the IRS without considering your financial condition. Unfortunately this is not the case as the IRS requires you to complete detailed forms and provide documentation regarding your finances.
When determining if it will accept your offer, the IRS considers the equity you may have in your assets such as your home, bank account, retirement plans, and car. In addition, they will review your income and allowable living expenses to determine whether you have any excess income to pay toward your back taxes.
Our Boca Raton taxpayer is a stockbroker who is treated as an independent contractor and therefore not subject to income and social security tax withholding. He is required to make quarterly estimated tax payments to meet his tax obligations. Unfortunately, he failed to make sufficient estimated tax payments for several years and his tax debt including interest and penalties accumulated to almost $165,000.
After meeting with him and performing a financial analysis we determined the best course of action to resolve his back taxes was to submit an offer in compromise. The taxpayer’s only asset was his home valued at $700,000 with a mortgage of $600,000. We determined that his monthly income less allowable living expenses left $1,100 a month available to pay the IRS toward back taxes.
When calculating the equity in your assets, the IRS considers them to be worth “quick sale value” which in most cases is 80% of the actual value. Although the taxpayer had $100,000 equity in his home, the IRS considers the equity to be zero calculated as follows: 80% of $700,000 = $560,000 less $600,000 mortgage. Therefore, we did not have to include the taxpayer’s equity in his home a part of the offer amount.
Since the taxpayer had excess monthly income he was required to include that in his offer amount. Depending on whether you choose a lump sum payment offer or periodic payment offer a multiple of 12 or 24 is applied to your excess monthly income. The taxpayer chose to make a lump sum offer and thus the offer amount was $13,200 (12 x $1,100).
Now that the IRS accepted the taxpayers offer, his back tax debt of $165,000 is completed settled for $13,200. As part of all offers in compromise, taxpayers must meet all their tax obligations on a timely basis for the next five years or be considered in default and will again owe the unpaid back taxes.
If you work or reside in Boca Raton or elsewhere in Palm Beach or Broward Counties, and want to learn if an offer in compromise is the solution to your back tax problems, call our CPAs today at 561-826-9303 to schedule your free consultation.