What Does Tax Offer Compromise Involve?
Do you owe taxes to the IRS? Then the tax department officials are probably hounding you to pay up through various communication channels! You are then very likely to be looking for ways to handle this situation in the light of your current financial state. Did you know that there is an option available and you can use it to pay a lesser amount as final settlement than your actual tax dues? Tax Offer Compromise alias Offer in Compromise (OIC) is the alternative given to taxpayers who cannot pay up all their pending taxes in the foreseeable future.
Only when the Tax department is satisfied that you do not possess the ability to pay back the tax-dues either in full or by entering into a payment agreement, they consider your case for OIC. For this they do a thorough analysis of your finances – assets (including real estate, automobiles, bank accounts etc), liabilities, sources of income, current and anticipated income levels etc. Based on these and after allowing a minimum amount as a basic living expense, they arrive at the Reasonable Collection Potential, RCP. Only when you offer to pay an amount equal to or exceeding the RCP value, the IRS personnel agree for the compromise choice.
If you are a new taxpayer or you just want to improve your knowledge about taxation and what it means to you, then you possibly want to know some of the Federal Tax IRS jargon and what they mean. Federal tax is collected by the Federal government of the US and IRS stands for Internal Revenue Service. How is the actual tax arrived at for an individual? – By getting their gross income, subtracting their eligible deductions and then applying the relevant tax rate to that amount.
1) Gross income includes the accumulated income for all sources.
2) The Adjusted Gross Income (AGI) is arrived at by deducting the Above-the-Line Deductions from the Gross Income.
3) Taxable income is calculated by deducting the Itemized or Standard Deductions (whichever is lesser) and the Personal Exemptions from the AGI
4) Tax rate is applied to this taxable income for the Tax Dues
5) From tax dues you can claim further reductions through Tax Credits like Child Tax Credit
Sometimes you might want to know in advance how much you can expect as tax return from the IRS. You probably want to employ this value in your financial planning. You can make use of online tools called Tax Refund Estimators to estimate tax return. The tools simplify the estimation process and make it real fast too. A typical estimate tool has a few screens to collect all the necessary information for calculating the tax refund or tax owed. The data fields are grouped together on screens. You will be asked to feed info like personal details, income sources/ details, data concerning various expenses, eligible deductions and their particulars, tax that has been paid or the amount you have planned to pay. The tool now calculates and displays the refund estimate.