Submitting a compromise offer [OIC] is a great way to reduce tax arrears through the IRS. However, when making an offer to the US Internal Revenue Service, there is always a question as to whether taxpayers must make an offer to the government to redeem their 401k plan.
When conducting OIC with the IRS, taxpayers must provide the government with a wealth of financial information. This includes not only bank accounts, real estate and vehicle information, but also any 401k plans or other retirement plans that taxpayers may have.
Therefore, on the 433-A financial disclosure form, the taxpayer will disclose the value of his 401k plan minus any of his loans to 401K. However, if the taxpayer is to be allocated from his 401k plan, the taxpayer will be subject to additional federal income tax and state income tax. Then this will only increase the taxpayer's tax debt, so what should the taxpayer do?
In this case, the taxpayer should disclose his 401k minus the value of the loan on Form 433-A, minus the federal tax, minus the state tax. For example, let's assume that John is 45 years old and is presenting OIC to the IRS. His 401k plan has $40,000. John offered a $10,000 loan to his 401k plan, so he could be allocated a net amount of $30,000.
Regarding this potentially distributed tax, John must pay a 10% penalty for early distribution because he is under 59 years of age. His federal tax rate is 25%, so the total federal tax associated with this allocation will be 35%, while the state's tax rate is 5%. Therefore, the federal and state total tax burden will be 40%.
Then, this will only leave 60% of the $30,000 or $18,000 as eligible to repay the arrears of tax through a compromise offer. The $18,000 is the dollar amount that John should disclose on Form 433-A when he made a compromise offer to the US Internal Revenue Service.
The proposal to prepare for success in the compromise is very time consuming and technical. If you have arrears of tax with the IRS and want to resolve it by establishing an OIC, you should seek professional assistance from an experienced professional, such as Michael McNamee, author of this article.
Orignal From: Cash in 401k cash by compromise
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