How does a Grandparent’s income effect the OIC application?
When submitting an Offer in Compromise, you need to think about what could the IRS potentially receive from you as far as income. The IRS term is Reasonable Collection Potential. If a grandparent resides in the home with the taxpayer and contributes to the household expenses, this will increase your household income as you are not paying this expense, but the grandparent would be. Additionally, the IRS OIC states you must include any and all additional sources of income used to support the household, for example anyone else who may contribute to the household income. In this case, the grandparent.
How the IRS OIC formula works is they use all sources of income in the household and all the expenses from everyone in the home, with some exceptions. At times it can work in your favor, but other times it may mean your Reasonable Collection Potential doesn’t allow for an Offer In Compromise.
Example
In a recent Offer submitted by our firm, in the home resided the Taxpayer, his spouse, their two daughters and a grandparent. All four (daughters share a car) have a car with loans. Grandparent has credit card debt in the amount of $500 and a Whole Life Insurance Policy. Additionally, the grandparent receives Social Security Income, Pension Income and pays the mortgage.
Now, the Offer only allows for two cars: The Taxpayer and his Spouse. The Offer does not allow for credit card payments as that is included elsewhere and does not allow for the grandparents Life Insurance payment. Not fair? The IRS argues they have allowed (included) the two daughters (dependents) in the household along with the grandparent. However, they will include the grandparent’s income into the Offer amount and show they pay the mortgage, not the Taxpayer thereby increasing the taxpayer’s disposable income as he is less the mortgage payment.
On the other side of this coin, however, will depend on whom you have claimed as a dependent on your recent tax return, but that is another topic all together.
End Result
In the end, you will need to ensure your documents are in order and all your household expenses are lined out according to who pays for what. The Offer Examiner may disallow the grandparent in the household but include her income. Correct, that doesn’t make sense. In the end, the Offer Examiner is using a calculation table and only has a certain amount of wiggle room in those calculations. So, be prepared when the determination is made you could be a full pay based on Reasonable Collection Potential.
Don’t be afraid to request your Offer be taken up to Appeals. In most cases, it’s better to work with Appeals.
Lastly, be sure you are working with a firm that takes the time to review your financial condition. This includes your dependents, employment status, bank statements, income statements, investments, life insurance policies, vehicle statements, etc. This is only a small part of what is needed to submit a successful Offer, so be sure you are working with someone with whom you are most comfortable.
If you feel that you may be in over your head, or just want to get a second opinion, let’s set up a short call. To avoid the back and forth emails and phone tag, I have included a link to my Calendar https://calendly.com/taxman/tax-problem-resolution-initial-consultation. Let’s set up a 30 min. phone conference to get to know each other. The phone number to call is 855-829-5877 and my extension is 203.