Collateral Agreements

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While the IRS prefers to avoid Collateral Agreements as part of Offer in Compromise settlements (they are very rare), sometimes they will require one to collect additional money under the terms of the Offer in Compromise. In most cases the provisions, amount and payment terms shown on Form 656 are sufficient for the entire settlement.

If possible, you want to avoid a Collateral Agreement because it is generally to your detriment.

However, sometimes it is advisable to suggest a Collateral Agreement to the IRS. An example may be if you have a situation where your income has declined substantially in recent years. The IRS likes to average the last three years income for self-employed persons for determining your payment ability, but in case the IRS thinks that you’ll earn more in the future based on your past history of higher earnings you could counter by suggesting they accept an Offer based on your current income and take a Collateral Agreement in case your income does go up. If your income doesn’t increase in the future, you don’t have to pay anything under the Collateral Agreement, and it has cost you nothing.

Here are some factors that affect whether the IRS will want a Collateral Agreement:

·               If there is evidence of a substantial increase in your future earnings, the IRS will consider a Collateral Agreement.

·               If your income hardly exceeds your expenses and your income does not appear likely to rise faster than your expenses, no Collateral Agreement will be considered.

·               If you have investment property likely to substantially appreciate in value in the foreseeable future, the IRS will consider a Reduction of Basis and Future Income Collateral Agreement.

·               If you are seeking compromise of a 100% penalty and using capital loss benefit or stock in your defunct corporation, the IRS will consider a Waiver of Loss Collateral Agreement.

·               If you are a corporate taxpayer with a large net operating loss carrying forward, but are now making a profit in the current year, the IRS will consider Loss and Future Income Collateral Agreements.

·               If you make a high income but are 60 years old with serious health problems, the IRS will probably not insist on a Collateral Agreement.

·               If you are an only child of wealthy parents and the surviving parent is well advanced in years and in poor health, the IRS will consider a Future Income Collateral Agreement.

 

Collateral Agreement “Buy Out”

It is possible to “buy out” a collateral agreement by Offering a specified amount in addition to the base Offer amount. This is a major consideration for those who are privately anticipating a large increase in income within five years of the Offer in Compromise acceptance.

You can Offer the IRS money to buy out a Collateral Agreement. This should be shown as an increase in the amount Offered on Form 656 to provide additional payment for the compromise in lieu of a Collateral Agreement. The IRS will consider your “buy out” of the Collateral Agreement when your Offer has been determined to be potentially acceptable and the IRS agent has decided that you should be party to one or more of the Collateral Agreements appropriate to your case.

TIP: An adequate “buy out” amount can be a sticky issue. The IRS will take a dim view of the case if it is discovered that you hid information about future windfalls during the Offer process. On the other hand, the IRS prefers to have a lump sum cash settlement instead of a Collateral Agreement. The future cannot be predicted with certainty and the government would prefer a “buy out” when Collateral Agreements seem likely.

 

More information about Collateral Agreements is at:  www.irs.gov/irm/part5/irm_05-008-006


 

Other Articles: (in process of updating and posting to the web. Available when there is a link.)

Tips, Tricks, and Traps to Avoid

Identifying your income

Compliance Requirements

What Information Is Needed to Complete an OIC Package?

Future Income

Necessary & Allowable Living Expenses

Dissipated Assets

Annuitizing Assets to Produce Future Income



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