If you or your business have gotten behind with the IRS, a tax settlement, also known as an Offer in Compromise (OIC), might be the best way to get rid of your tax liability—if you qualify. There are three general categories of OICs: Doubt as to Liability (I don’t actually owe this tax), Effective Tax Administration (I could pay the tax liability off, but it would cause a hardship), and Doubt as to Collectability (I owe it, but I can’t afford to pay it back). Far and away, the vast majority of OICs are settled on the basis of Doubt as to Collectability. How to get a tax professional to settle a Doubt as to Collectability OIC for “free” is the topic of this article.
Qualification for an IRS OIC Tax Settlement
First, you need to have an idea of whether you might be a good candidate for a Doubt as to Liability Offer in Compromise (which, for the sake of simplicity, I will just refer to as “OIC” for the rest of this article). To do so, ask yourself the following questions:
- If I were to liquidate my investments and sell everything I own that isn’t a standard household item or necessary for the production of income, would it generate enough money to fully pay my tax liabilities including penalties and interest?
- Are my living expenses significantly higher than that necessary to live a relatively modest lifestyle in my county of residence?
- After I pay the necessary living expenses for myself and my family each month, is there enough left over to make a monthly payment to the IRS of at least 2% of the total tax liability including penalties and interest?
- If it is a business liability, is the business generating enough net income to make monthly payments equal to at least 2% of the total tax liability owed including penalties and interest?
- If it is a business liability, does the business own assets that are not necessary for operations, which could be sold and used to fully pay the tax liability?
If you answered “no” or “maybe” to each of the above questions, I would strongly encourage you to consult with a tax professional. You might be a strong candidate for an OIC. Some people and businesses do, indeed, settle their tax liabilities for pennies on the dollar, and you might be one of those people or businesses.
Many tax resolution companies offer a free consultation during which a knowledgeable representative can help determine whether you or your business might be a good candidate for an OIC. My firm, Fortress Tax Relief, takes it a step further and will allow you to consult with a licensed tax attorney before you are under an obligation to pay fees.
Take advantage of a free consultation, whether with Fortress or another firm. Just be careful. There are some less reputable firms out there who will falsely tell you that you qualify for an OIC in an effort to pick your pocket. If someone tells you that you qualify for an OIC but doesn’t ask you about your income, expenses, and assets, hang up the phone! It is impossible to evaluate whether you are a good OIC candidate without first gathering some information about your financial circumstances.
Also, check the firm out with the Better Business Bureau. If the firm has been around for at least a few years and has an “A” or better rating with the BBB, you should be relatively safe. If you still have doubts after speaking with one firm, call another and get a second opinion.
So, let’s say you do your homework, find a reputable firm, have your free consultation, and it is determined that you are a strong candidate for a tax settlement (OIC). How do you get the firm to negotiate your settlement for free? Obviously, tax professionals have to charge fees for their services. However, due to the way the IRS determines an acceptable settlement amount, the fee that many qualified OIC candidates pay to their tax professional winds up being money that they won’t have to pay to the IRS. Thus, the taxpayer effectively gets free services from his or her tax professional.
To illustrate this concept, assume the following:
- You owe the IRS $25,000
- You have a mortgage of $160,000 on a $200,000 home, and your housing and utility expenses are within the maximum allowable for your county of residence
- You have $7,500 in savings
- You have no other investments
- Aside from typical household items, you have no equity in any of your other assets
- You live modestly, and have no money left over at the end of each month after you pay living expenses for yourself and your family (in other words, your gross income minus allowable living expenses is zero).
The IRS uses the following mathematical formula to determine an acceptable settlement amount: (Net Realizable Equity in Assets) plus [(gross income minus allowable expenses) times 12]. If that sounds confusing, read on. It will make better sense once you see how it plays out.
The first component of this formula is Net Realizable Equity in Assets (NRE). To determine NRE in a home (as well as many other non-liquid assets), take 80% of the home’s market value ($200,000 times .8 = $160,000) and then subtract the senior encumbrances (here, the $160,000 mortgage). In this example, the NRE in your home is $0. Since your savings account is a liquid asset, you then add $7,500 to the $0 NRE of the home, and arrive at $7,500 NRE. In this example, $7,500 is also your total NRE as you have no other assets with equity except for your household items, which are exempt.
If you have a question or do not see the service you need listed within this site; Fortress Tax Relief still may be able to help you, please feel free to contact us!
If you or your business have gotten behind with the IRS, a tax settlement, also known as an Offer in Compromise (OIC), might be the best way to get rid of your tax liability—if you qualify. There are three general categories of OICs: Doubt as to Liability (I don’t actually owe this tax), Effective Tax Administration (I could pay the tax liability off, but it would cause a hardship), and Doubt as to Collectability (I owe it, but I can’t afford to pay it back). Far and away, the vast majority of OICs are settled on the basis of Doubt as to Collectability. How to get a tax professional to settle a Doubt as to Collectability OIC for “free” is the topic of this article.
Qualification for an IRS OIC Tax Settlement
First, you need to have an idea of whether you might be a good candidate for a Doubt as to Liability Offer in Compromise (which, for the sake of simplicity, I will just refer to as “OIC” for the rest of this article). To do so, ask yourself the following questions:
- If I were to liquidate my investments and sell everything I own that isn’t a standard household item or necessary for the production of income, would it generate enough money to fully pay my tax liabilities including penalties and interest?
- Are my living expenses significantly higher than that necessary to live a relatively modest lifestyle in my county of residence?
- After I pay the necessary living expenses for myself and my family each month, is there enough left over to make a monthly payment to the IRS of at least 2% of the total tax liability including penalties and interest?
- If it is a business liability, is the business generating enough net income to make monthly payments equal to at least 2% of the total tax liability owed including penalties and interest?
- If it is a business liability, does the business own assets that are not necessary for operations, which could be sold and used to fully pay the tax liability?
If you answered “no” or “maybe” to each of the above questions, I would strongly encourage you to consult with a tax professional. You might be a strong candidate for an OIC. Some people and businesses do, indeed, settle their tax liabilities for pennies on the dollar, and you might be one of those people or businesses.
Many tax resolution companies offer a free consultation during which a knowledgeable representative can help determine whether you or your business might be a good candidate for an OIC. My firm, Fortress Tax Relief, takes it a step further and will allow you to consult with a licensed tax attorney before you are under an obligation to pay fees.
Take advantage of a free consultation, whether with Fortress or another firm. Just be careful. There are some less reputable firms out there who will falsely tell you that you qualify for an OIC in an effort to pick your pocket. If someone tells you that you qualify for an OIC but doesn’t ask you about your income, expenses, and assets, hang up the phone! It is impossible to evaluate whether you are a good OIC candidate without first gathering some information about your financial circumstances.
Also, check the firm out with the Better Business Bureau. If the firm has been around for at least a few years and has an “A” or better rating with the BBB, you should be relatively safe. If you still have doubts after speaking with one firm, call another and get a second opinion.
So, let’s say you do your homework, find a reputable firm, have your free consultation, and it is determined that you are a strong candidate for a tax settlement (OIC). How do you get the firm to negotiate your settlement for free? Obviously, tax professionals have to charge fees for their services. However, due to the way the IRS determines an acceptable settlement amount, the fee that many qualified OIC candidates pay to their tax professional winds up being money that they won’t have to pay to the IRS. Thus, the taxpayer effectively gets free services from his or her tax professional.
To illustrate this concept, assume the following:
- You owe the IRS $25,000
- You have a mortgage of $160,000 on a $200,000 home, and your housing and utility expenses are within the maximum allowable for your county of residence
- You have $7,500 in savings
- You have no other investments
- Aside from typical household items, you have no equity in any of your other assets
- You live modestly, and have no money left over at the end of each month after you pay living expenses for yourself and your family (in other words, your gross income minus allowable living expenses is zero).
The IRS uses the following mathematical formula to determine an acceptable settlement amount: (Net Realizable Equity in Assets) plus [(gross income minus allowable expenses) times 12]. If that sounds confusing, read on. It will make better sense once you see how it plays out.
The first component of this formula is Net Realizable Equity in Assets (NRE). To determine NRE in a home (as well as many other non-liquid assets), take 80% of the home’s market value ($200,000 times .8 = $160,000) and then subtract the senior encumbrances (here, the $160,000 mortgage). In this example, the NRE in your home is $0. Since your savings account is a liquid asset, you then add $7,500 to the $0 NRE of the home, and arrive at $7,500 NRE. In this example, $7,500 is also your total NRE as you have no other assets with equity except for your household items, which are exempt.
If you have a question or do not see the service you need listed within this site; Fortress Tax Relief still may be able to help you, please feel free to contact us!
