Your tax debt- Part 6 – Analyzing your Financial Situation to determine what Collection Option “fits” you
In order to start resolving your tax debt, you need to analyze your financial situation- past, present, and future. Remember, step one is to make sure that you truly owe the tax debt in question (or in this case- collection!). The best option is always to lower your tax liability to the minimum if you are over-assessed. However, if you owe the tax, choosing the best collection options will need to consider at least all of the following items:
1. Whether you have all your tax returns filed
2. Whether you are in payment compliance for the future
3. Your income from all perspectives (recent three months, currently, past three years, normalized, etc.)
4. Your expenses and how they compare to the IRS Allowable Living Standards (“ALE”s)
5. Your assets and liabilities- and what is the net realizable equity in these assets and the liquidity in these assets
6. Whether you have transferred any assets out of your name (referred to as “dissipated assets” by the IRS) that was not used to pay your taxes or necessary living expenses since the date of assessment of the tax debt due (this includes loan refinancing, 401K/IRA distributions, sales of assets, transfer of assets to family or friends, etc.)
7. Amount of tax debt owed and the time period the IRS has to collect (referred to as the Collection Statute of Limitations or “CSED”)
These facts will determine the Monthly Disposable Income (“MDI”) that the IRS will want as an installment agreement payment (if MDI is $25 or less- the IRS will put you in “Currently not collectible” or “CNC” status). If the MDI reasonable collection potential (i.e. MDI multiplied by a factor of 48, 60, or the collection statute depending on the “Offer” terms selected) added to all of your net realizable equity in assets (dissipated assets also) is less then your tax, you may want to consider the Offer in Compromise (if you can pay the Offer amount).
However, it is not that easy. There are many considerations- most financial. I recommend that you consult a competent tax professional for all of your options and questions so that you do not put yourself in a worse situation.