When dealing with an IRS Offer in Compromise, there are a few main types of offers to consider:
- Lump Sum Cash Offer
- Short Term Payment Offer
- Deferred Payment Offer
Each of these types of offers can cause you to pay different amounts for your Offer in Compromise.
How The Offer Amount in an Offer In Compromise is Computed.
The IRS looks at the following items when calculating a taxpayer’s minimum Offer in Compromise, regardless of the payment option selected: One difference in the amount of the minimum Offer in Compromise amount for each payment type is how the Monthly Net Income Available is calculated.
Lump Sum Cash Offer
The Lump Sum Cash Offer is the most common type of payment option. It can be the least costly. The IRS uses a forty-eight (48) month factor in calculating a taxpayer’s future earning potential. Larger factors are used when applying other payment options.
A multiplier is used by the offer division to determine the future earning potential of a taxpayer applying for an Offer in Compromise. The IRS calculates a taxpayer’s monthly net available income by comparing gross monthly income to his or her allowable monthly expenses. This monthly net available income is projected into the future, determined by the rules governing the types of offers selected. The IRS often projects the net income available over the next forty-eight (48) months, when using the lump sum cash offer option.
If the IRS determines a taxpayer has $10 in monthly net available income, they will ask for a Lump Sum Cash Offer in Compromise for at least $480, as it relates to the taxpayer’s income and expenses. Added to this will be the value in equity of the assets, plus any dissipated assets the IRS wants added back.
As Lump Sum payments go, paying off the full offer amount will obviously be the fastest. The IRS allows the taxpayer 150 days to pay the Offer in Compromise in full after the date of acceptance.
When the statute of collection remaining on a liability is less than the payoff period, the taxpayer will pay off the offer sooner, or negotiate a waiver to extend the period of payback.
An initial deposit of 20% of the initial offer amount is required to be made on a when a lump sum cash offer is filed. The deposit is not refundable even if the offer is later rejected. However, if the taxpayer qualifies for a hardship and submits the hardship form, the deposit may be waived.
Short Term Periodic Payment Offer
Taxpayers who elect the short term payment offer do not have to pay the offer amount within 150 days. The taxpayer has to make monthly payments for twenty-four (24) months once the offer is submitted.
Instead of a forty-eight (48) month multiplier, the IRS will use a sixty (60) month multiplier. The taxpayer will have more time to make their offer payments, but the total offer amount will be larger. If the taxpayer doesn’t have net income left from the income and expense calculation, the offer amount will be the same as a lump sum cash offer. This is because it is based on the equity in assets.
The first calculated payment must be made with the initial short-term periodic payment offer. Subsequent payments are made while the offer is being reviewed. If the offer is rejected, the payments made will be applied to the taxpayer’s tax liability. Payments made in the offer process are not refundable.
Deferred Periodic Payment Offer
This can be the most costly type of offer, because the amount paid will be a lot more, just so you can make lower monthly payments. The multiplier used in this type of offer is the number of months remaining on the statutory period of collections. The taxpayer will be making monthly payments based on their net income available for as long as the IRS can collect on the tax liability or the tax liability has been paid in full.
There is often little benefit to this type of payment arrangement. Getting a regular monthly payment plan may be a better choice.
It’s important to seek an experienced professional firm while filing an offer in compromise. Please consider our services.
- If you are considering hiring us, call Joe Mastriano, CPA 713-774-4467.
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