We’ve all seen them: commercials on TV, radio and the internet advertising IRS tax debt relief. These companies claim to negotiate with the IRS on your behalf and settle your tax debt for far less than you owe. They will even offer up examples of taxpayers that have owed tens of thousands, even hundreds of thousands of dollars to the IRS that settled their debt for pennies on the dollar. This may be technically true, and taxpayers settle their debts with the IRS for much less than they owe every day. But what these companies don’t want you to know is that this is a publicly available program – you don’t need any company to negotiate on your behalf.
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The IRS knows that taxpayers can have trouble paying their tax debts, it’s happened since the government started collecting taxes. Invariably, some people won’t be able to pay. So it makes sense they developed a process for people to become solvent with regards to their tax debt. For starters, you can get on a payment plan with the IRS. This won’t settle your tax debt and it won’t lower the amount you owe but it will prevent the IRS from putting a lien on your assets or levying your bank accounts or paychecks. This is good, but at the end of the day you still owe the money.
A key portion of being able to settle your tax debt for less than you owe is your ability to pay. If you owe $10,000 and you have millions of dollars in assets, its going to be a tough sell to negotiate that amount down. But if you owe $10,000 and have zero assets or even negative assets (debt), chances are you can get them to accept less. After all, the IRS is sort of like a business. They would rather get something than nothing.
So if you can convince the IRS that you have no ability to pay the amount owed but can somehow put together some kind of a payment, you can pitch that to them in the form of an “offer in compromise.” There are of course some pre-qualifiers. You can only submit an offer in compromise once, so if you’ve done this in the past you are out of luck. You also need to have filed all your tax returns, regardless of payment. You cannot be part of a bankruptcy proceeding and various other requirements.
Here’s some data on the IRS and offers in compromise. In 2014, the IRC received 68,000 offers in compromise from delinquent US taxpayers. The good news is the IRS accepted 40% of those offers, or roughly 27,000 offers in compromise. Those offers totaled $179 million, so you can see why the IRS does this. That’s $179 million our US Treasury might not have otherwise had. For those quick with a calculator you will see that that is an average settlement of $6,629.
This does not mean that your settlement offer for $6,629 will be accepted, or that you have a 40% chance of having your offer accepted. The IRS has a very detailed algorithm for evaluating each taxpayer’s offer in compromise and that is dependent on your individual circumstances, amount owed, and ability to pay.
Ability to pay is really the key thing here, the IRS is trying to get the full amount owed if it can. So they will want to know about all your income – if you are employed they will ask for paystubs or if you are self-employed they will want to see a recent profit and loss and balance sheet from your business. They also want to know about any other forms of income you may have. It is of course of paramount importance to always be honest with the IRS and not try to hide any income.
The IRS also wants to know about your expenses. These include living expenses, housing and utilities, loan payments including car payments, food, clothing, rent, any expenses you incur on a monthly basis. The IRS has a formula for these as well, called Collection Financial Standards. They are basically allowable living expenses, and the effect can be to create more cash flow than you actually have by applying these amounts the IRS thinks are reasonable.
Your collective income minus your “allowable living expenses” equals your monthly cash flow. The IRS uses this value to determine if your Offer in Compromise is fair and represents an advantage for them to collect on your debt. They combine this with the current market value of any assets you may posses and with all this information determine your ability to pay.
You must prepare an application that consists of various forms that will convey to the IRS your current financial situation including current assets and liabilities. You must prepare these forms with the utmost care and scrutiny, as you only get one shot at this. You also need to include the offer amount as a payment with your offer and here’s the big catch – if your offer is not accepted, the IRS still keeps your settlement offer money and applies it to your balance owed. So it is very important to put together a reasonable offer in hopes of having it accepted.
Now it’s fine (and recommended) to retain a tax professional to help you with this process. But hopefully now you are much more informed and equipped to hire the right tax professional that will help you navigate this process and resolve your IRS tax debt.
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1. https://www.irs.gov/newsroom/irs-explains-how-offer-in-compromise-works, 2. https://howardlevyirslawyer.com/2015/05/18/how-much-money-will-the-irs-settle-for-in-an-offer-in-compromise/
