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Doubt As To Collectability

Doubt-As-To Collectability (DATC)

An offer in compromise (OIC) DATC is an agreement between a taxpayer and the IRS that settles a taxpayer's entire tax debt for less than the full amount owed. The IRS looks at the collection potential of a taxpayer’s assets in income in excess of that person’s reasonable and necessary living expenses. Assuming that a taxpayer has nominal assets and no income in excess of that person’s reasonable and necessary living expenses, a $10 million tax debt could be settled for $1,000. That is, the IRS is focused on what they call “reasonable collection potential” (RCP) and not the amount of the tax debt owed, no matter how large the tax debt. This settlement is based on tax law, tax regulations, the Internal Revenue Manual administrative guidelines, and judicial precedent.

New clients are screened and given guidance to tailor the financial affairs of a client to get the lowest possible settlement. As a small example, if a taxpayer has $20,000 deposited in a bank, the IRS will not settle for less than the $20,000 because it is a RCP asset. If that $20,000 is used as a deposit on a $100,000 housing unit, that $20,000 will be sheltered because the IRS will discount all real estate by 20%. In this case, the $100,000 unit less the $20,000 deposit will give that person an $80,000 mortgage. The $20,000 RCP is gone and the taxpayer will make payments on property owned rather than continue to pay rent. There are many ways to minimize RCP so that the OIC is settled at the lowest possible amount.

The RCP includes the net value of a taxpayer's assets, such as real property, automobiles, bank accounts, insurance, discounted retirement accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses.

The IRS calls “future income” the amount of income less reasonable and necessary living expenses. Example: A taxpayer has monthly income of $4,000. Reasonable and necessary living expenses include housing, transportation, health insurance, child care, and other similar necessary expenses. In this example, if those expenses are $4,000 or higher, there is a zero amount that the IRS will take into account in its RCP computation.

The following is a list of expenses that will offset wage or business income:

  1. Food & clothing. The IRS accepts National Standards for this amount in lieu of proving the cost for food and clothing.
  2. Housing and utilities
  3. Vehicle payments to purchase an automobile (there is a ceiling on this amount)
  4. Public transportation if there is no vehicle
  5. Health insurance
  6. Out of pocket health costs
  7. Court ordered payments
  8. Child/dependent care
  9. Premiums on term life insurance
  10. Current year’s taxes (Income/FICA)
  11. Secured debt
  12. Delinquent State or Local taxes
  13. List of other expenses
  14. Business expenses if there is business income

To qualify for an OIC, the taxpayer must have filed all tax returns. It is in the taxpayer’s interest to have filed all tax returns because the amount owed can be settled in the OIC. For businesses, the taxpayer must make all required estimated tax payments for the current year, and make all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

A taxpayer submitting an OIC based on DATC must use the most current version of Form 656, gOffer in Compromise, and also submit Form 433-A (OIC). If the taxpayer is self-employed, fill out  Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses.

There is a nominal application fee required for the IRS to process the OIC.

As indicated above, the OIC DATC is based on objective factors. For this reason, our tax attorney can give you guidance on the likelihood of settlement and even the anticipated settlement amount. That guidance is given in a free consultation. For immediate guidance, call 212-588-1113 and request a consultation with a tax attorney.