Taxation & Estate Planning

Offer in compromise pointer: Claim the $200 ownership cost for an older car

By howardlevy

Before jumping in with an offer in compromise, it is important to understand how the standardized IRS expense allowances apply to you, and how they can benefit you.

Here is a valuable offer in compromise expense allowance to be aware of and to claim:

The IRS will allow you to claim a $200 vehicle ownership cost if you own an older vehicle and do not or will not have a car payment on it.  Yes, the IRS will give you an expense in this situation even if you do not actually have it.

In an offer, the IRS is trying to predict your future cash flow to pay them back. The purpose of the $200 auto ownership cost allowance is recognition that older cars will need replacement, and, as a result, it is likely you will have a car payment in the near future, even though you do not have one now.

You will qualify to claim the $200 auto ownership cost on your IRS 433A financial statement submitted with an offer in compromise if:

1.     You own a car and there is no monthly payment on it; or

2.     You own a car and have a monthly payment, but the car will be paid off before the IRS statute of limitations on collection expires;

and

3.     The car is over six years old; or

4.     The car has over 75,000 miles.

Here is an example from Internal Revenue Manual 5.8.5.6.3 illustrating the IRS’s allowance of auto ownership costs on older vehicles in compromises:

“The taxpayer, owns a 1995 Ford Taurus, with 90,000 reported miles. The vehicle was bought used, and the auto loan will be fully paid in 30 months, at $300 per month. In this situation, the taxpayer will be allowed the ownership expense until the loan is fully paid, i.e., $300 plus the allowable operating expense of $231 per month, for a total transportation allowance of $531 per month. After the auto loan is retired in 30 months, the ownership expense is not applicable; however, at that point, the taxpayer will be allowed a $200 operating expense allowance, in addition to the standard $231, for a total operating expense allowance of $431 per month.”

If the car referenced in this IRS example had no car payment when the offer was submitted, the IRS would immediately allow the $200 ownership cost allowance, rather than waiting for the car to be paid off.

Either way, making use of every IRS expense allowance in an offer in compromise goes a long way towards getting an offer through and putting the IRS behind you.

Full post as published by IRS and the Law on September 26, 2010 (boomark / email).