a.k.a. How can I settle with the IRS for “pennies on the dollar”?
The IRS can be a fearsome creditor, levying bank accounts and other assets or filing liens to notify the public of your debt to the IRS. On rare occasions, the IRS may seize your home or criminally prosecute you for willful failure to pay tax.
Many companies prey on people’s fear of the IRS and offer to help you settle with the IRS for “pennies on the dollar.” What are they talking about?
The IRS operates several programs to allow a taxpayer to resolve their debts with the IRS without suffering the anxiety and pain of IRS levies. One of the most beneficial of these programs, the Offer in Compromise (“OIC”), permits a taxpayer to settle for less than the amount owed. Depending upon your financial situation, you might even resolve your debt for pennies on the dollar.
An Offer in Compromise is not available to all taxpayers, but available based upon their financial situation. The IRS calculates what it could possibly squeeze out of a taxpayer over the collection statute (typically ten years). The IRS looks at four parts of a taxpayer’s financial life when evaluating a proposed OIC: assets; liabilities; income; and expenses.
When looking at assets, the IRS looks at a taxpayer’s assets. These assets include all vehicles such as cars, trucks, boats, ATVs, airplanes, and motorcycles. The assets include tangible assets such as guns, coins, items in a safety deposit box, real estate, artwork, antiques, jewelry, tools, and furniture. The assets also include financial assets such as bank accounts, investment accounts, interests in companies (stock, partnership interests), virtual currency (Bitcoin), and life insurance policies.
Thankfully, the IRS reduces the value of these assets by the amount owed against the asset, but not below zero. For example, if the taxpayer owns a house worth $500,000 and has a mortgage of $400,000, the IRS permits this offset to determine the equity in the house. Better yet, the IRS reduces the market value of the house by 20% prior to taking the mortgage into account. This means the IRS reduces the value of the $500,000 house by 20% to $400,000. Thus, the house is worth $0 for purposes of an Offer in Compromise. This exercise is repeated for all a taxpayer’s assets with subtle differences depending upon the asset.
Once a taxpayer computes the total assets minus allowable liabilities, part 1 of the Offer in Compromise is complete. The taxpayer then moves to the income and expense sections. The income section includes income earned from self-employment, a taxpayer’s business, and wages earned as an employee. Additional income categories include gambling income, subsidies such as rent or agricultural, gig economy activities such as Uber or Lyft driving and Airbnb rentals, and unemployment income. Lastly, income includes social security and pension income, interest, dividends, royalties, partnership distributions, child support, and alimony.
The final piece of the Offer in Compromise is the monthly household expense section. We frequently hear from taxpayers who attempted to submit their own Offer in Compromise and contact us to appeal a rejection. In reviewing rejected Offers in Compromise, the most common area of dispute is the expense section. The IRS only allows a certain amount for many of the categories, irrespective of the actual amount paid by a taxpayer.
This means that the mortgage payment allowed on the $500,000 house may be reduced when the IRS determines how much a taxpayer can afford to pay to the IRS. For example, if the taxpayer is a single individual in Phoenix, Arizona, the maximum monthly housing allowance (including utilities) is $1,543. If the taxpayer actually pays $2,000 per month for the mortgage and utilities, he or she needs to pay the IRS $457 more than the taxpayer actually takes home each month. While there are exceptions to the maximum allowable expenses, the process isn’t as simple as entering all of the numbers on the form to see what happens.
Ultimately, all of these figures result in two possible numbers for the Offer in Compromise, a lump sum cash offer, which must have 20% of the offer amount paid with the submission of the OIC. The taxpayer pays the remaining 80% of the offer over a period of five months after the acceptance of the Offer in Compromise by the IRS. The second option is a periodic payment. The taxpayer must pay the offer amount over 24 months, with the first payment due upon submission of the Offer in Compromise and payments continuing each month until the offer amount is fully paid.
Overall, the OIC process is a mathematical computation for which a taxpayer either does or does not qualify. While there are certain rules to know when completing the paperwork, not everyone qualifies for an Offer in Compromise. This cannot stop a taxpayer from submitting an OIC but Offer in Compromises submissions failing to meet the IRS’s rules are ultimately rejected.
Kaczmarek & Jojola PLLC assists taxpayers with IRS collection issues, including Offers in Compromise. Our former IRS trial attorneys frequently work with IRS Revenue Officers, Appeals Officers, and IRS attorneys to resolve IRS debts. Questions? Please call or email Derek W. Kaczmarek (firstname.lastname@example.org“>or 602-899-6200, extension 1) or David R. Jojola (email@example.com 602-899-6200, extension 2)