Secrets to Settling
for Pennies on the Dollar
with the IRS
You have seen the ads on TV. “Settle for pennies on the dollar with the IRS! This is your one-time chance to get your life back!”
I get asked all the time, “Can I really settle with the IRS for pennies on the dollar?”
And I always answer quietly, “Maybe.”
In this article I will show you how you can settle with the IRS for less than you owe and who qualifies. The companies advertising on TV, as well as many accounting firms that handle this type of tax issue, typically charge $3000 to $12,000. This is why they say, “If you owe the IRS $10,000 or more…”
Before we get started, you need to know that the Offer in Compromise offered by the IRS, the “settle for less” offer, is not always the best deal you can get from the IRS. Several additional choices are also available, even if you owe less than $1000, and the cost and time involved can be significantly less. We will discuss these other options later. Now, we will dig into the details of the Offer in Compromise offered by the IRS and by some states.
Follow the Formula
to Success
The IRS has a simple formula to determine how much they will settle for: quick sale price of property minus secured debt against property plus two years disposable income.
What does quick sale of property mean? Quick sale of property is 80% of the appraised value. Example: You own a home valued at $200,000 with a $150,000 mortgage balance. Quick sale of a $200,000 property, 80%, is $160,000. Your mortgage is $160,000, so you have $10,000 to pay the IRS, according to the IRS, in your Offer in Compromise. You are NOT required to sell your home. The IRS feels that you can sell, refinance, or take a second mortgage up to the 80% level to pay them.
How is the disposable income calculated? Certain expenses are actual expenses and some use a table provided by the IRS called the National Standards. To view the current National Standards use the following link:
http://www.irs.gov/businesses/small/article/0,,id=104627,00.html
For many people the National Standard table living expenses are generous. However, in high cost areas of the U.S. it is difficult to live within the amounts the IRS allows.
Two years of disposable income are calculated as follows: take your monthly income minus certain expenses (secured car loans, etc.) minus allowed expenses from the National Standard table. If this amount is positive, you multiply by 24 months for the amount of disposable income the IRS want to see in an Offer in Compromise.
If your real expenses for certain items are higher than the National Standard table, you will need to reduce your lifestyle to get an accepted Offer in Compromise. An Offer in Compromise is a way to clear up your tax liability, but it is rarely a pleasant experience. Most people need to exercise a lifestyle cut to make the Offer in Compromise work. If you offer less than the quick sale minus secured liability plus two years disposable income you are wasting your time and money.
The TV ad guys may tell you they can settle for less to get your money. When the offer is declined you still have a tax problem plus you are out the money paid to the firm preparing the offer. The IRS accepts about 11% of submitted Offers in Compromise. If you follow IRS guidelines, your acceptance rate should exceed 90%. Now you know what is possible and can be better prepared when dealing with this complicated tax issue.
Let me show you a simple Offer in Compromise calculation the IRS should accept. Businesses are always more complicated and require more paperwork, but still doable.
Example: You own a home with a mortgage as listed above. Let us assume your income is exactly $3000 per month, married, with two children, and your mortgage payment, property tax, and insurance are $1200 per month.
Here is the breakdown:
Income $3000
Home -1200
Expenses -1042 (from National Standard table)
Disposable
Income $758 per month
24 months $18,192
Quick sale minus mortgage is $10,000.
With the above example you will need to offer the IRS $29,192 to get an accepted offer (disposable income for 24 months, $18,192, plus equity in home of $10,000).
This is a very simple example. You may have lower income or no equity in your home. If you rent, only the disposable income counts. There are also limits to how much housing costs count. We included no utilities or auto expenses which would lower the offer amount. With above example, if you owed the IRS $200,000, this could be a real savings. If you only owed $20,000, an offer less than the full amount would not be accepted.
Because of the complex issues, I recommend you hire a competent tax professional that handles Offer in Compromises. Call us at 920-725-5331 for a free consultation if you think you may qualify for an Offer in Compromise.
This article is not large enough to handle all issues in an Offer in Compromise. Get a free consultation to make sure.
The Offer in Compromise is not the only way to reduce your tax liability. If you owe a small amount, (small to the IRS, but large to you), say $3000, an Offer in Compromise will be difficult. Or, if you owe a larger amount and have a larger income or more equity in your home the Offer in Compromise will only waste your time and money.
Some states do not have a statute of limitation for the state to collect. Many states have Offer in Compromise programs, but are less formal and more difficult to qualify for, especially if you are younger in age.
In the remainder of this article I want to share with you three additional ways to deal with your tax liability and even reduce it, using: statute of limitation, installment agreement, and abatement.
Get Out of Tax
Free Card
First, the statute of limitation at the federal level says the IRS has 10 years to collect from you from the due date or the date you filed, whichever is longer. If the IRS owes you, you only have three years to file your claim. Not very fair, is it?
You must file the return before statute of limitation starts counting. Also, several things can stop the 10 year countdown temporarily, like the Offer in Compromise while it is being considered (a one year plus proposition), a Due Process Hearing, and a few others.
If you own real estate, the IRS will file a lien against your property prior to the statute of limitation running out. The lien can stay with the property indefinitely.
If your situation is very dire, this can be an option. If you owe the IRS $100,000, have little or no income, and 9 years have ticked off the statute clock, it may be worth waiting out the last year when the IRS can no longer collect.
I Paid My Tax,
Now Gimme My Money Back
Second we have the installment agreement. This will not reduce your tax liability; it gives you more time to pay. This can fit better into your budget. The IRS still want an installment agreement payment to be more than token. Again, disposable income comes into play. Once a tax liability is paid in full you can file for abatement.
The IRS will not forgive tax or interest under the abatement program, but will frequently forgive the penalties. This is not a guarantee, but my experience is that 90% plus are accepted. You need to provide a reason you deserve abatement; any reasonable excuse can be grounds for a penalty reduction or elimination. Since penalties can be a large portion of the amount due, abatement should be filed anytime a penalty is assessed and paid. Abatement is low cost so it should be filed anytime a penalty is paid.
Before I finish I want to touch on two more issues. If you feel you do not owe the tax a Due Process Hearing is available.
I'll Fight to the
Highest Court in the Land
If you were assessed tax from an audit you have the right to appeal and tax court. With rare exception, all assessments from an audit should be appealed. The auditors grab too much and this can be reclaimed in many instances in appeal.
Thank you for stopping by our website. Contact us if you have any questions or need our services. Valuable resources are also available on the left hand side row of buttons on our home page.
Tax Prep & Accounting Services, Inc
1535 Plank Rd
Menasha WI 54952
920-725-5331
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