Every year we here from taxpayers who have IRS debt and are looking for a solution. Inevitably, they will also make a reference to the possibility of settling their debt for less than what they owe. What usually follows is a conversation about what this actually means and how most people DON’T qualify for it. Let us elaborate.
In advertising, you’ll hear companies talk about settling back taxes for 20%, 10%, or even less than the original balance. What these ads, and the sales people whom you talk to on the phone, are trying to sell you is an Offer in Compromise service package. This package is a reference to the IRS Offer in Compromise (OIC) program, which allows eligible tax debtors to pay the IRS an amount of money that is less than what they owe in order to wipe out their entire tax liability.
The phrase “pennies on the dollar” was actually determined several years ago by the IRS to be a form of deceptive advertising. As a result, they explicitly instruct licensed practitioners that using this phrase is a violation of Circular 230, which is the handbook us practitioners must follow when working with the IRS. However, since the IRS doesn’t always have jurisdiction over firms that just market these services, it comes into the FTC’s purview to look out for these deceptive marketing practices.
Some ads, web sites, and salesmen are out there trying to convince taxpayers that what you settle for is some fixed percentage of your tax debt. However, this is blatantly incorrect. There is absolutely no provision in the tax code for allowing a taxpayer to pay a set percentage of their tax liability and just calling it good. This has never existed, and most likely never will.
Instead, the amount of your OIC settlement is calculated using a very, very strict formula. What’s even better is that this formula is NOT secret — it’s available on a worksheet in IRS publication 656B.
Based on this formula, if you have equity in assets that exceed your tax debt, you simply don’t qualify. Period. End of story. For most individuals, the common thing is going to be equity in your house or rental properties, or perhaps equity in a collection of classic cars, stamps, coins, guns, art, etc. If the value of ANY of that stuff is greater than your tax debt, you do not qualify for the OIC and cannot settle for “pennies on the dollar” – there is no way around this.
In the same vein, if you are a high income earner, it’s also highly unlikely you will qualify for the OIC. The reason for this is that the IRS only allows certain amounts of money every month as “eligible expenses” for housing, cars, food, etc. If your lifestyle exceeds these amounts, the IRS doesn’t care — they will only allow you to claim the National Standard expenses. Any monthly income over those amounts gets multiplied by either 48 or 60, and THAT number goes into your offer amount.
In these circumstances, you may qualify for a period of up to 12 months to make a “lifestyle adjustment” and reduce your living expenses to come into line with IRS standards. This will often involve selling luxury homes and getting rid of toys such as cars and boats. Keep in mind that these items are all covered by your tax lien, so any proceeds from the sale of these items technically is owned by the IRS, and should be paid over to them. A good tax representative can assist you with structuring these sales so that both you and the IRS get something out of it.
In closing, beware of anybody promising that your tax debt can be settled for some fixed percentage. That’s not the way it works and a skilled professional can show you if you stand a chance at qualifying for the OIC. Anybody trying to sell you on the percentage idea might as well be selling you swampland in Florida, and you’ll be best served to seek assistance elsewhere.