Jun 21, 2008

Q&A: IRAs and the Offer in Compromise

Question: Will the IRS ever accept an OIC when there are sufficient funds in the taxpayers IRA to pay the debt although reducing the IRA would cause the retired taxpayer hardship? I guess I am referring to the concept of Effective Tax Relief. Do they actually do that in real practice?

Answer:
Although it is possible to make an argument for Effective Tax Administration ("ETA"), it is not likely the IRS will accept this argument (see the blog entry). In fact, there is recent evidence to show that the IRS has accepted as few as "1" ETA offers in a single year.

The ultimate question for you is how does this determine your collectability and do you have any unusual circumstances that would warrant an ETA (i.e. medical, etc.). The IRS will allow you do consider the tax effects of distribution from an IRA to determine collectability but ultimately it is your monthly disposable income that they can collect over the course of the collection statute plus the net realizable equity in your assets.

Ultimately, you need to consider all options. This will take into account collection statutes, assets, liabilities, your income and expenses, extraordinary circumstances and other mitigating factors.

As a public policy, the IRS is pre-disposed to allowing OICs and not considering IRA assets. Their reasoning is that the IRA balance was built on the non-payment of taxes- a subsidy that the government would not want to discourage.

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