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:
Other Articles:
(in process of updating and posting to the web. Available when there is a link.)
Necessary & Allowable Living Expenses
Annuitizing Assets to Produce Future Income
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