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Offer in Compromise - Retired Debt

When a taxpayer files an Offer in Compromise with the Internal Revenue Service (IRS), they will evaluate the taxpayer’s ability to pay the taxes owed. As part of this evaluation, the IRS will look at the taxpayer’s income and expenses. For purposes of the Offer in Compromise, it is common practice for the IRS to determine if all claimed expenses are “allowable” and if the expense will be “retiring” in the near future. A debt is retired when it has been paid in full or satisfied by some other means.

When an Offer in Compromise is filed on a “cash” basis the IRS will typically conduct a 48-month projection to see if the taxpayer’s expenses will still be in existence. When an Offer in Compromise is filed on a “short-term deferred” basis the IRS will typically conduct a 60-month projection to see if the taxpayer’s expenses will still be in existence. If the IRS determines that the expense will be retiring, then the IRS will determine whether the absence of the expenses creates a positive net difference between the income and expenses. If so, the IRS will multiply this net difference against the balance of the monthly projection period to create an amount that should be factored into the taxpayer’s reasonable collection potential or offer amount.

Taxpayers representing themselves, and many inexperienced practitioners, commonly overlook retired debt when filing an Offer in Compromise. In many cases, the IRS identifies a retired debt issue that results in the rejection or significant increase of the Offer in Compromise. In some cases, although a taxpayer may not have the ability to pay their taxes today, they may have the ability to pay their taxes in the future when retired debt is considered. Thus, in situations like this, a Currently Not Collectible status may be a better alternative for the taxpayer than filing an Offer in Compromise.

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Source: RoniDeutch.com