Can I Really “Settle for Pennies on the Dollar?”
Probably not. It’s not that it cannot happen, but the warning is that it is extremely unlikely in the majority of cases.
Unfortunately, this is one of the biggest myths around. The misinformation is propagated by well-known, so-called tax resolution firms who advertise heavily on television.
IRS itself has issued a warning to consumers to not be misled and get taken by such firms. Every year this firm sees a number of unhappy customers from such firms with unresolved tax problems and wallets several thousand dollars lighter.
You don’t need to go far to research the firms. Type the names into Google. After the firm’s main site, the list of complaints, and there are many, should follow.
The reason that this statement by the TV firms is baloney is because it is highly misleading. Only in very, very few cases does IRS settle tax debts for under ten percent of the balance owing. Often I tell clients that to get that type of deal from IRS, you will need to be living under a bridge somewhere.
The IRS offer in compromise (OIC) program, which the tax firms pitch, basically offers tax debtors a chance to settle debts at a discount based upon a two-part formula which combines net worth and disposable income over forty-eight or sixty months, depending upon the payment plan you chose.
Generally, net worth is calculated by adding up the face value of cash, cash-equivalents, and the “quick sale value” (80% of fair market value) of other property, minus any loans secured against the property.
Disposable (net) income, basically, is determined by taking gross income and subtracting from it expenses – but not your actual expenses. Instead, for the most part, IRS uses standard expenses derived from national, regional and local Census data. For example, a family’s food expense is based upon a national standard. And, as we all know, food in Fairfax, Virginia or Silver Spring, Maryland does not cost the same as food in Biloxi, Mississippi. This leads to distortions in net income.
The disposable income amount is multiplied by a factor of 48, if the applicant offers to pay the settlement within 5 months of the IRS decision (or the time remaining under the legal deadline to collect the tax, if less); or is multiplied by a factor of 60, if the applicant offers to pay the settlement within 5 to 24 months of the IRS decision (or the time remaining under the legal deadline to collect the tax, if less).
The multiplied disposable income amount is added to the net worth amount to arrive at a total -- what the compromise offer should be, one would think.
The requirements are complicated, but straightforward enough according to the directions and forms provided by IRS for the OIC application. However, in practice, the IRS has very broad discretion to bring in variables you may not consider fair.
For example, IRS may ask to review your finances for the time during which the tax liability was outstanding, and you may be required to provide statements for bank accounts, loans, credit applications, etc. IRS may conclude that you had “dissipated assets” during that time – property you could have sold to pay off the tax debt, but used it for some other purpose -- so the agency will add the value of that property to the offer it would require you to make. This is money you don’t have now that IRS would require you to pay toward the offer!
Or the IRS will prorate your expenses, based on the number of members in your household, whether or not you support them, and thereby inflate your disposable income, and the consequent acceptable offer.
Often this still leaves an offer that is beyond the tax debtor’s ability to pay. Or, if the total the IRS comes up with is more than the outstanding balance presently due, the IRS will absolutely refuse to compromise. Period.
You can appeal the agent’s initial decision within the agency, but generally there is no viable appeal to an independent decision-maker such as a court.
A final decision takes about a year, and during that time, you probably will have to re-submit updated financial information several times for successive evaluations.
Where an offer can be effective is when the liability is huge and any forgiveness would be welcome. Our firm has seen tax liabilities in the millions that were obviously not payable, so that a discount to hundreds of thousands may be somewhat manageable, depending.
Before you lose time and money to the outfits making wonderful promises to you on TV, check them out carefully. You may see they do not, and cannot, deliver what they say.