Tax Relief Blog
Navigating the complexities of tax liabilities can be daunting for many taxpayers. One of the avenues available for those struggling with significant tax debt is the IRS Offer in Compromise (OIC) program. This program allows taxpayers to settle their tax liabilities for less than the full amount owed, provided they meet certain criteria. However, one critical aspect that can affect the acceptance of an OIC is the concept of dissipated assets. This article delves into the details of the IRS Offer in Compromise program and explores how dissipated assets can impact taxpayers.
Get professional help with your OIC offer in compromise by calling us at 1-877-788-2937.
What is an Offer in Compromise?
An Offer in Compromise is an agreement between a taxpayer and the Internal Revenue Service (IRS) that allows the taxpayer to settle their tax debt for less than the full amount owed. The IRS may accept an OIC if it believes that the offered amount is the most it can expect to collect within a reasonable period. The primary goal of the OIC program is to facilitate the collection of what is potentially collectible at the earliest possible time and at the least cost to the government.
Eligibility Criteria
To qualify for an OIC, taxpayers must meet specific criteria:
Inability to Pay: The taxpayer must demonstrate that they cannot pay the full tax liability through an installment agreement or other means.
Doubt as to Collectibility: There must be doubt that the IRS can collect the full amount owed within the statutory period for collection.
Effective Tax Administration: Even if the taxpayer can pay the full amount, the IRS may accept an OIC if requiring full payment would create an economic hardship or be unfair and inequitable due to exceptional circumstances.
Forms and Documentation
Taxpayers must use the most current version of Form 656, Offer in Compromise, and submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses. For offers based on doubt as to liability, Form 656-L is required.
The Role of Dissipated Assets
Dissipated assets refer to assets that a taxpayer has sold, transferred, or otherwise disposed of for less than their fair market value, often to avoid paying taxes. The IRS scrutinizes these transactions closely when evaluating an OIC, as they can significantly impact the taxpayer’s ability to settle their tax debt.
Identifying Dissipated Assets
The IRS considers several factors to determine whether an asset is dissipated:
Timing of the Transaction: Transactions that occurred shortly before or after the tax liability arose are scrutinized more closely.
Purpose of the Transaction: The IRS examines whether the transaction was conducted to avoid paying taxes or for legitimate reasons.
Fair Market Value: The IRS assesses whether the asset was sold or transferred for its fair market value.
Impact on Offer in Compromise
Dissipated assets can negatively impact the acceptance of an OIC in several ways:
Increased Offer Amount: The IRS may require the taxpayer to include the value of dissipated assets in their offer amount, increasing the total amount they need to pay.
Rejection of the Offer: If the IRS determines that the taxpayer dissipated assets to avoid paying taxes, it may reject the OIC outright.
Extended Collection Efforts: The IRS may pursue additional collection efforts to recover the value of dissipated assets, including legal action.
Case Studies: Dissipated Assets and OIC
Case Study 1: Sale of Property Below Market Value
John, a self-employed contractor, owed $100,000 in back taxes. To settle his debt, he sold a piece of property worth $50,000 for $20,000 to a friend. When John submitted an OIC, the IRS identified the property sale as a dissipated asset. As a result, the IRS required John to include the $30,000 difference in his offer amount, increasing his total offer to $50,000.
Case Study 2: Transfer of Assets to Family Members
Mary, a small business owner, transferred $40,000 worth of stocks to her sister shortly before her tax liability arose. When Mary applied for an OIC, the IRS flagged the transfer as a dissipated asset. The IRS rejected her initial offer and required her to include the $40,000 in her revised offer, which she ultimately could not afford, leading to the rejection of her OIC.
Strategies to Address Dissipated Assets
Taxpayers can take several steps to address dissipated assets and improve their chances of having an OIC accepted:
Full Disclosure: Be transparent about all asset transactions when submitting an OIC. Provide detailed explanations and documentation to support the legitimacy of the transactions.
Fair Market Value: Ensure that all asset sales and transfers are conducted at fair market value. Obtain appraisals or other evidence to support the valuation.
Legitimate Reasons: If assets were sold or transferred for legitimate reasons, such as medical expenses or business needs, provide documentation to support these claims.
Consult a Tax Professional: Work with a tax professional experienced in OICs to navigate the complexities of dissipated assets and develop a strong case for the offer.
The OIC Process: Step-by-Step
Step 1: Pre-Qualification
Before submitting an OIC, taxpayers should use the IRS’s Offer in Compromise Pre-Qualifier tool to determine their eligibility. This tool helps taxpayers assess whether they meet the basic criteria for an OIC.
Step 2: Gather Documentation
Taxpayers must gather all necessary documentation, including financial statements, asset valuations, and explanations for any asset transactions. This documentation is critical for supporting the OIC application.
Step 3: Complete Forms
Taxpayers must complete Form 656 and the appropriate Collection Information Statement (Form 433-A (OIC) or Form 433-B (OIC)). These forms require detailed information about the taxpayer’s financial situation, assets, and liabilities.
Step 4: Submit the Offer
The completed forms and supporting documentation must be submitted to the IRS along with the application fee and initial payment. The IRS will review the offer and may request additional information or documentation.
Step 5: IRS Evaluation
The IRS will evaluate the offer based on the taxpayer’s ability to pay, income, expenses, and asset equity. The IRS may also consider any dissipated assets and their impact on the offer amount.
Step 6: Negotiation and Acceptance
If the IRS accepts the offer, the taxpayer must comply with the terms of the agreement, including making the required payments. If the offer is rejected, the taxpayer has 30 days to request an appeal.
Common Pitfalls and How to Avoid Them
Incomplete Documentation
One of the most common reasons for OIC rejection is incomplete or inaccurate documentation. Taxpayers should ensure that all forms are completed accurately and that all required documentation is provided.
Underestimating Asset Values
Taxpayers may underestimate the value of their assets, leading to a lower offer amount. It is essential to obtain accurate valuations and provide supporting evidence to avoid this pitfall.
Failure to Disclose Dissipated Assets
Failing to disclose dissipated assets can lead to the rejection of an OIC and additional penalties. Taxpayers should be transparent about all asset transactions and provide explanations and documentation to support their legitimacy.
Unrealistic Offer Amounts
Submitting an offer that is too low can result in rejection. Taxpayers should work with a tax professional to determine a realistic offer amount based on their financial situation and the IRS’s guidelines.
The IRS Offer in Compromise program provides a valuable opportunity for taxpayers to settle their tax liabilities for less than the full amount owed. However, the presence of dissipated assets can significantly impact the acceptance of an OIC. Taxpayers must be transparent about all asset transactions, provide accurate valuations, and work with a tax professional to develop a strong case for their offer. By understanding the complexities of the OIC process and addressing dissipated assets proactively, taxpayers can improve their chances of achieving a favorable outcome and resolving their tax debt.
Get professional help with your OIC offer in compromise by calling us at 1-877-788-2937.
