When a taxpayer and their tax attorney decides to go with an offer in compromise in order to settle the taxpayer’s debt to the IRS, the deal needs to be approved. Sometimes, other things are on the table which can affect whether or not the IRS accepts the offer. One of those lesser known, but perfectly valid items is what is called a Future Income Collateral Agreement.
While complex in sound, the basic idea is that the taxpayer offers the IRS the possibility of payment over and above the total amount being offered in compromise. However, that money isn’t necessarily guaranteed. The idea is that the taxpayer has a reasonable expectation that within three to five years of the offer in compromise being accepted, they will have a stronger income either in the form of regular earnings, inheritance, a trust, or sale of a large asset.
The taxpayer and tax attorney is suggesting to the IRS that if they accept the offer in compromise and this sort of promissory note, they will pay the IRS the full amount of the offer plus a percentage of the increased income. The idea from the standpoint of the taxpayer is that the collateral agreement sweetens the deal for the IRS and causes them to accept the offer in compromise when they otherwise might not have, due to the fact that it was a much smaller amount than they were looking for.
As an example, a taxpayer is ordered to pay $15,000 in back taxes, fees, and penalties, but is currently unemployed and engaged full time to provide care to an ailing parent. The parent has major assets and that taxpayer is the sole beneficiary in the will so the collateral agreement makes sense for all concerned. The taxpayer makes a reasonable but small offer in compromise of $1,000 with the collateral of 15% of the eventual inheritance which has an estimated value of $100,000 and will likely come to him/her within 1-3 years based on the health of the parent. After that, the IRS gets their money, the debt is settled, the taxpayer is clear and can resume his/her career plus have the remainder of the inheritance in the bank.
As you can see, this is one of those situations that would likely only work in a small number of cases, but it is legitimate and the IRS is looking more favorably upon such arrangements these days.
By: Timothy S. Hart
Our New York tax law firm offices are located in New York State but we are able to help you in any state across the country. We can work with you no matter where you live. Mr. Hart is licensed to deal with the IRS in every state in the entire country.