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Mathematics – The Most Critical Element Of Offer
Negotiation.
The mathematical analysis explained below
is intended to give taxpayers an idea of mathematics negotiated in settlement. To
fully understand mathematics in settlement, a taxpayer must be aware of the
IRS’s constant procedure changes and have extremely good negotiation skills –
otherwise an offer rejection is a foregone conclusion.
Mathematical analysis is only a portion of the
entire offer negotiation process yet it is by far and away THE MOST COMMON
CAUSE for offer rejection.
MATHEMATICAL ANALYSIS MUST BE DONE BY A QUALIFIED INDIVIDUAL!
Offer In Compromise: Doubt As To Collectibility
(Hardship).
The IRS lets taxpayers settle by paying a one-time payment or payment plan. The minimum payment allowed is determined by equity and cash flow considerations. The equation for the minimum offer amount is:
IRS Minimum Offer = (Equity *
80%) + (Monthly Cash Flow * 48)
The equation is easy to understand:
Lower equity = lower offer AND Lower cash flow = lower offer.
Equity Considerations - Include as little as possible.
The IRS will (almost) never tell anyone to sell homes, etc., to get cash for settlement. Instead, they use the wording that ‘if you did decide to sell or take a loan against your property’ here is what I would get. So they automatically try to include all equities in settlement regardless of condition and age.
Some equities are 100% collectible, such as cash but most equities are collectible at 80%.
Some equities are not considered given age and health. A person will frequently be able to keep his or her retirement if they are near retirement. Retirement accounts will always be included in the offer when a person is young enough to work years to replenish the account.
Home equity may or may not be considered depending on a person’s cash flow and debt-to-equity ratios. If home equity is to be omitted it HAS to be omitted because inclusion would cause severe hardship AND because of debt-to-equity ratios.
The IRS considers transferred equity. People like to quitclaim property to friends or family before settlements. Then the person owing taxes shows no equity at settlement time. The IRS will sniff this out and counter any offer as if the property was still owned by the taxpayer.
BUT… if the equity was transferred BEFORE taxes were owed then equity is usually not included. However, equity will still be included as a counter if a liable person is paying 100% of the bills for a property they do not own and especially if they live in it for a number of years.
NEVER EVER try to avoid offering equity because of credit problems. It simply does not work because most of the credit problems stem from the IRS liens which can only be released through payment or settlement.
The IRS includes car and truck equity. These retail/fair values can be readily obtained from Edmunds.
The IRS includes life insurance cash value and investment equity.
The IRS includes furniture, etc., in your home but NO ONE can take a loan against a couch or table so these should be omitted. The only time furniture, etc., should be included is when there is substantial value – which is rarely the case.
Cash Flow Consideration – Keep cash flow as low as
possible.
Monthly cash flow is defined as: Monthly Cash Flow = Household Income – Necessary Expenses.
The equation is easy to understand: Lower household income = less cash flow AND HIGHER expenses = less cash flow.
Cash flow must be minimized or completely wiped out during negotiation. Cash flow is THE MOST IMPORTANT part of settlement. If a person has it tax agencies want it.
Cash flow becomes a big problem in negotiations because the IRS counters in two ways when there is cash flow.
· The IRS counters for all cash flow left over for the full 48 month window - or longer.
· The IRS counters when loans against equity can be obtained (that wipe out cash flow with the loan payments). There is no hardship equity exclusion for poor debt-to-equity ratios when a person has cash flow because cash flow is an indication of GOOD debt-to-equity ratios.
WHEN OFFERS GET REJECTED FOR MATHEMATICAL
REASONS, CASH FLOW IS ALMOST ALWAYS THE REASON. IT IS THE REASON ABOUT 90% OF
THE TIME. IT IS IMPERATIVE TO WIPE OUT CASH FLOW AT OFFER SUBMISSION TIME AND
LET THE IRS COME BACK WITH THEIR VERSION OF CASH FLOW IN COUNTER. THIS CAN NOT
BE STRESSED ENOUGH.
Most people do not have the ability to save cash at offer time (or any time for that matter) so it is obvious they have no cash flow. All they have to do is prove they have no cash flow through proper presentation and negotiation. Once that is done the probability of counter or rejection is dramatically reduced.
Expenses – Keep as high as possible.
The IRS has maximum allowable expense amounts, called standards, for food and clothing, transportation, mortgage/rent and utilities. The standards allow the IRS to remove any ‘unnecessary/excess’ expenses from the cash flow equation. Taxpayers can spend beyond the standard amounts but the excess is disregarded during the offer as if it is not being spent at all. That reduces expenses in the cash flow equation, which in turn increases cash flow. The most common standard exceeded by taxpayers is the housing and utility standard.
The excess amounts can be allowed for taxpayers if they can show a special need. Surprisingly, there are numerous angles of attack here and many excess payments for standards have been allowed. The special needs issue gets very document oriented and is far too difficult to discuss in its entirety here.
The IRS allows all amounts spent for medical/dental as well as term life insurance premiums, taxes, secured debt and student loans (for the taxpayer) and business expenses.
The IRS does not allow payments for whole life insurance and certain investments BUT those payments should be included anyway, ESPECIALLY if the IRS is seeking equity from those insurances and investments. The IRS’s own doctrine can be used for justification. It is quid pro quo (this for that). In other words, if it is fair for the IRS to collect equity from an asset it must also be fair for the taxpayer to be allowed payments as necessary expenses for that asset.
The IRS does not allow payments to religious affiliations. The IRS does not allow payments for unsecured debt such as loans from relatives and charge card payments BUT charge card payments can be allowed for NECESSARY expenses as described above.
Counters in settlement, because of expense issues, can be minimized by the following:
· Miss NOTHING. Make sure ALL expenses are discovered and included.
· Justify the excess on the standards as much as possible.
· Recast unsecured payments to the source where applicable so they can be allowed.
· Always demand quid pro quo for equity inclusions.
Always make sure ALL expenses are included AND properly included in the corresponding necessary expense category.
Income – Keep as low as possible.
Income is total household income. That includes all people and all sources.
The IRS has a game here. They call it income averaging. The problem is that they do not apply averaging consistently and people must be prepared for this in settlement.
Income averaging is usually done over the last three years – when it is advantageous for them to do so. The IRS will always use the current income number if it is higher than the three year average. Sometimes, the IRS will use the highest of the three numbers. Sometimes the IRS will pick a number out of their hat, or elsewhere. The IRS will ALWAYS try to have income as high as possible in settlement because it gives them their best chance at showing taxpayers as having cash flow according to their equation.
Income MUST be stated realistically by taxpayers at offer submission. Taxpayers MUST make the IRS come back with a counter offer. Starting with an excess income figure is almost certainly a foregone rejection.
Counters in settlement, because of income issues, can be minimized by the following:
· Use the IRS’s same inconsistent rules. Pick a LOWER income number for average income AND always pick current income in periods of declining income.
· Do NOT include overtime wages. Overtime is never guaranteed.
· Never include wages from a second job. Second jobs can never be sustained over time.
The less income a person shows by utilizing IRS rules the better chances are for a successful settlement. Always be conservative because conservative is much more ascertainable.