Tag Archives: IRS Offer In Compromise

10 Options For Solving Your IRS Debt

When it comes to settling your tax debt, there are 10 options “commonly” employed by resolution professionals (such as ourselves) or the individual taxpayer (see full explanations below):

»          Full pay the tax owed
»          File unfiled returns to replace Substitute for Returns (SFR’s)
»          Dispute the tax on technical grounds
»          Currently Not Collectable
»          Installment Agreements
»          Offers In Compromise
»          Penalty Abatement
»          Discharging taxes in bankruptcy
»          Innocent Spouse relief
»          Expiration of the Collection Statute

OPTION ONE – Full pay the tax owed
While seldom a popular option, sometimes the taxpayer does have the ability to pay the tax outright or borrow against an existing asset e.g. refinance a home mortgage or take out a home equity loan.

Surprisingly, in this situation, this option is usually the least costly of viable options available to the taxpayer. The reason for this is two-fold:
»         The taxpayer’s equity in assets will usually disqualify the taxpayer from benefiting from options which grant debt forgiveness.
»         Until the tax debt is paid in its entirety, it will continue to accrue additional penalties and interest.

OPTION TWO – Filing unfiled tax returns and replacing Substitute for Returns
When resolving a tax problem, it is relatively common to find that the taxpayer has back tax returns which have not been filed. There are three reasons why it is necessary to file the required back tax returns and get the taxpayer “Current” so to speak:
»         Failure to file tax returns may be construed as a criminal act by the IRS and can be punishable by one year in jail for each year not filed. Filing unfiled returns brings the taxpayer “Current”
»          Filing unfiled returns to replace “Substitute for Returns” may lower the tax liability owed and the associated interest and penalties
»          A settlement cannot be negotiated with the IRS until the taxpayer becomes “Current”

OPTION THREE – Dispute the tax on technical grounds
If there is a technical basis to dispute the amount of tax owed, there are a number of paths to consider, including:
»         Filing an amended return if the statute of limitations to file has not expired
»         Filing an Offer In Compromise – Doubt as to Liability

OPTION FOUR – Currently Not Collectable Status
If a taxpayer does not have positive cash flow above the level to pay their necessary living expenses or have equity in assets to liquidate, the taxpayer may qualify for Currently Not Collectable Status (CNC). This is most commonly seen when the tax payer is unemployed or underemployed. In this situation, the IRS places a temporary hold on the collection of the tax owed until the taxpayer’s financial situation improves. If over a longer period of time, the tax payer’s financial situation does not improve, the taxpayer may then become a viable Offer In Compromise candidate.

OPTION FIVE – Installment Agreements
In most cases, the IRS will accept some type of payment arrangement for past due taxes. In order to qualify for a payment plan the taxpayer must meet set criteria. They include:
»          The taxpayer must be current- all returns must be filed
»          Disclose all assets owned
»          The difference between the taxpayer’s monthly income and allowable monthly expenses will be the amount that the IRS will request that the taxpayer pay on a monthly basis
»          Monthly payments will continue until the taxes owed are paid in full

OPTION SIX – Offers In Compromise
The IRS Offer in Compromise program provides taxpayers that owe the IRS more than they could ever afford to pay, the opportunity to pay a small amount as a full and final settlement.

»          This program also allows taxpayers that do not agree that they owe the tax or feel that the tax has been incorrectly calculated, a chance to file an Offer in Compromise and have their tax liabilities reconsidered.
»          The Offer in Compromise program allows taxpayers to get a fresh start.
»          All back tax liabilities are settled with the amount of the Offer In Compromise.
»          All federal tax liens are released upon IRS acceptance of an Offer In Compromise and payment of the amount offered.

An Offer in Compromise filed based on the taxpayers inability to pay the IRS looks at the taxpayer’s current financial position and considers the taxpayers ability to pay as well as the taxpayers equity in assets. Based on these factors, an Offer amount is determined.

»          Taxpayers can compromise all types of IRS taxes, penalties and interest.
»          Even payroll taxes can be compromised.

If the taxpayer qualifies for the Offer In Compromise program, they may be able save thousands of dollars in taxes, penalties and interest.

OPTION SEVEN – Penalty Abatement
In most cases, penalties make up 10-30% of the total tax obligation. A penalty abatement request can eliminate some or all penalties if the taxpayer has reasonable cause for not paying the tax on time or paying the appropriate amount of tax.

Reasonable cause includes:
»         Prolonged unemployment
»         Business failure
»         Major illness
»         Incorrect accounting advice
»         Incorrect advice from the IRS

To prevail in a penalty abatement request, as in most tax matters, the burden rests with the taxpayer to be able to adequately document the reasonable cause.

OPTION EIGHT – Discharging Taxes in Bankruptcy
Bankruptcy can discharge federal income taxes if certain requirements are met. However this depends upon both the type of bankruptcy and the type of tax owed.

Chapter 7 is the chapter of bankruptcy law that provides for the liquidation of non-exempt assets and the discharge of dischargeable debts. Chapter 11 and Chapter 13 provide for repayment of debt in whole or in part.

To discharge taxes in bankruptcy, a number of criteria must be met including:
»         36 months have expired from the tax return due date
»         24 months have expired from the date the tax was assessed
»         240 days have passed since the tax was assessed and filing bankruptcy
»         All tax returns must have been filed

OPTION NINE – Innocent Spouse relief
Sometimes a taxpayer will find themselves in trouble with the IRS because of their spouse’s or Ex-spouse’s actions. The IRS realizes that these situations do in fact occur.

In order to help taxpayers that have tax problems which are due to the actions of their spouse, the IRS has developed guidelines for taxpayers to qualify as an innocent spouse. If a taxpayer can prove they meet these guidelines, then the innocent taxpayer may not have to pay some or all the taxes caused by their spouse or ex-spouse.

OPTION TEN – Expiration of the Collection Statute
The IRS has 10 years from the date of assessment (usually close to the filing date) to collect all taxes, penalties and interest from the taxpayer. The taxpayer does not owe the tax after the 10-year date has passed.

Listed below are some of the most common exceptions to this rule:
»          If the taxpayer agrees in writing to allow the IRS more time to collect the tax
»          If the taxpayer files bankruptcy during the 10 year period
»          If the taxpayer files an Offer In Compromise.

IRS Offer in Compromise Requirements

By now, you’ve undoubtedly heard the radio commercials: “Settle your tax debt for pennies on the dollar…”

What these ads are referencing is an IRS program called an Offer in Compromise or OIC.   This program does allow you to pay a reduced amount of money as full settlement of your entire tax liability, including penalties and interest.  However, it’s not as simple as the commercials make it sound.

Most of those commercials will make one think that you simply take your tax debt, multiply it by some percentage and then you just pay them that amount and walk away.  Unfortunately, that is not how it works.

Part of determining whether you are even eligible to apply for an OIC has to do with the formula used to decide how much you will need to pay.  The formula is somewhat complicated, but an overly simplified version of it looks something like this:

  • Add up the value of everything you own: House, cars, furniture, jewelry, undergarments, stocks, bonds, cash, retirement accounts, tools, goats, art….EVERYTHING.  Call this number “A” – it represents the value of your assets.
  • Subtract your allowable expenses (the IRS won’t let you claim all actual expenses) from your total income.  Call this number “B” – it represents yours remaining income (this is what the IRS calls it – not your disposable income, which is probably less).
  • Multiply “B” times either 12 or 24, depending on how long you’re going to take to pay off the Offer in Compromise.  Call this new number “C”.
  • A + C = Z, where Z is the amount of money you can settle your tax liability for.

Here’s the kicker: If “Z” is more than what you owe the IRS, then you’re not eligible for the program.  The result?  You’re probably going to end up paying monthly payments on an Installment Agreement.

In addition to this formula, there are some other conditions for OIC applicants:

  • You must file all missing tax returns.
  • You must keep your nose clean with the IRS for 5 full years, otherwise they will re-bill you for everything they forgave.
  • You must make the OIC payments on time.
  • You must pay an application fee, unless you meet the low income guidelines.
  • If you end up being owed a refund on next year’s tax return, the IRS is going to keep that refund money.

The real problem for most people with the Offer in Compromise application process has to do with the part where they multiply your remaining monthly income by 12 or 24.  If you have $1,000 per month left over, and are going to take a year to pay off the Offer in Compromise, then you multiply by 24 to get to $24,000.  Well, if you also have $20,000 equity in your home, and no other assets, then your Offer amount is $44,000.  If you owe the IRS $35,000, you’re not eligible for the Offer in Compromise program.

It’s worth noting that, in March 2012, the IRS changed some of the Offer in Compromise rules.  The single biggest thing they did was to REDUCE that multiplier — it used to be 48 or 60.  For taxpayers with no assets, this change effectively reduced the necessary offer amount by up to 75% — making potentially hundreds of thousands of people eligible for the program that didn’t used to be.

HOWEVER….the IRS can change this back at any time.  If you are even thinking about applying for an OIC do it now! Feel free to call our office at 773.239.8850 and we’d be happy to help you get started.

The Truth About Settling Taxes for “Pennies On The Dollar”

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.