Common Mistakes People Make When Applying For An Offer In Compromise
An Offer in Compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship. Minor mistakes can have big consequences for Offer in Compromise (OIC) cases. Sometimes they can simply cause confusion and delays, but some can lead to outright rejection. Either way, making mistakes in an Offer In Compromise application will bring time-consuming and costly complications. To help you avoid some basic errors that could prove to be costly, Christopher G Carmona CPA, APC has put together a list of the most common mistakes people make when applying for an Offer In Compromise. When considering whether to file an Offer in Compromise or not, you should consider several issues beyond just that of the RCP calculation.
1. They’re not in compliance
The ultimate goal of the OIC program is a compromise that is in the best interest of both the taxpayer and your business. Acceptance of an adequate offer will result in creating an expectation of and a fresh start toward compliance with all future filing and payment requirements for you, the taxpayer. If you are not in compliance, it would undermine your ability to avail of a good Offer in Compromise by the tax laws.
2. Unable to make required estimated payments
An OIC is an agreement between a taxpayer and the IRS to settle a tax liability for less than the full amount owed. Thus, acceptance of an Offer in Compromise conclusively settles the liability of the taxpayer, absent fraud, or mutual mistake. However, the IRS will return any newly filed OIC application if you have not made any required estimated payments. Any application fee included with the OIC will also be returned. Any initial payment required with the returned application will be applied to reduce your balance due.
3. They have dissipated asset issues
Dissipated assets are anything of value that you had and subsequently sold, which could have satisfied your tax liability. For example, the sale of a business or car could be a dissipated asset. If the proceeds from the sale were spent on something other than your tax liability, and are no longer available to you, the IRS may add the value of the dissipated assets to your minimum offer amount. Dissipated assets and their treatment can be difficult for many taxpayers to understand. Therefore, one mischaracterized asset or one that is not accompanied by a proper explanation can cause an Offer in Compromise to be rejected.
4. Unable to accurately treat non-cash expenses (Depreciation)
If you are self-employed or have a small business, you must comply with instructions regarding business deductions and treatment of depreciation before you compute the net business income amount. You cannot deduct depreciation on a car used only for commuting, personal shopping trips, family vacations, driving children to and from school, or similar activities. Depending on the asset you have, you will need to calculate its depreciation according to the specifications. If you do not do it right, you won’t be able to get accurate information on the amount you owe the IRS and thus have your OIC denied due to faulty information.
5. They have orders of restitution involved
A restitution order requires the offender to pay the victim for financial losses the victim suffered because of the offender’s crime. Restitution can only be ordered for losses up to the time the offender is sentenced. It is part of an offender’s sentence and can be a stand-alone order or part of a probation order or conditional sentence. The IRS cannot compromise any tax liability arising from a restitution amount ordered by a court or a tax debt reduced to judgment.
These issues will not only impact the RCP calculation but may very well disqualify the taxpayer from filing an OIC. It is therefore critical that the practitioner consider each of these prior to filing the OIC. To avoid these and other mistakes, reach out to the experts at Christopher G Carmona CPA, APC. If you’ve received an IRS letter, or other tax correspondence from the IRS, a state agency, or a local agency, it can be difficult to know what to do next. We represent clients who owe IRS penalties, interest, and taxes. We offer our services across Diamond Bar, Los Angeles, Oceanside, Orange County, Riverside County, San Diego County, and the surrounding areas.
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