Getting Out of Trouble—the Offer in Compromise

By Christian Reeves

Tax Attorney

“Chris, I’m in a big trouble,” started one of my clients. “I owe around US$50,000 to the IRS for the last three years and I’m now unemployed. My only asset is a car worth about US$1,000. Do I have options?”

“Yes, you do,” I assured him.

My client owed back taxes, but couldn’t afford to pay the entire bill. I advised him to opt for an Offer in Compromise, which would allow him to clear his debt by paying just part of what he owed.

Let’s start with the basics.

The Offer in Compromise is a program established by the IRS aimed at helping people who can’t pay their back taxes because they are experiencing financial hardships. Through this program, taxpayers can negotiate a reduction of their debts.

“How come,” you’d ask. “Isn’t the government running huge deficits these days?”

Correct.

The government needs your money…but many hardworking Americans cannot afford to pay their bill in full. To the IRS it’s better to get back even a small percentage of that debt than nothing at all. Seen from this perspective, making a deal with you makes sense.

Note that the IRS does not grant Offers in Compromise to everyone. In fact, only one in every four Offers in Compromise filed is ever negotiated. However, when it made a deal, the IRS settled for an average of about 16% of the taxpayer’s ability (Source: United States Government Accountability Office, Report to the Committee on Finance, U.S. Senate, April 2006)

Filing an Offer is not for the faint of heart. You must prove you can’t afford to pay in full and it is in the best interest of the IRS to settle for less. This means that you have to open up all of your financial records to the IRS, including bank statements and mortgage documents. You need to provide receipts for each and every item on your expense list. To make matters even more complicated, you have to take into account the fact that the IRS has its own table of “allowed expenses” to determine what kind of lifestyle you should be permitted to keep until the tax debt is paid off. Properly analyzing your tax satiation (actual income vs. allowed standards) and fully documenting your case are the keys to getting an Offer in Compromise accepted.

 The Procedure

You will be required to submit forms 656, 433-A, and 433-B, if applicable, as well as all the supporting documentation to substantiate your assets, liabilities, income, and “allowed living expenses.”

The amount you can afford to pay the IRS each month is determined by subtracting from your average monthly income the “allowed living expenses.” In determining these living expenses, the IRS uses what it calls the “national standards” of what it will allow for food, clothing, and other items; the “local standards” are used to determine the maximum allowed expenses for housing, utilities, and transportation. These calculations are applied regardless of your actual expenses documented on form 433-A.

The amount you can afford to pay the IRS in the Offer in Compromise program is the value of this stream of income plus the value of your assets, such as retirement accounts, automobiles, real estate, etc. The value of your monthly payments (income stream) is calculated by multiplying the monthly figure by 48 or 60 months, depending on the type of Offer you submit. More on this in a minute…

Remember: The IRS will only consider an Offer in Compromise after all other payment options have been exhausted. In fact, the Service encourages you to explore all the available ways to pay the liability such as cash advances on credit cards, borrowing against 401(k) funds or life insurance policies, etc. You may even be given an extension of time to pay, ranging from 30 to 120 days.

Finally, before an Offer in Compromised is considered, the IRS evaluates the possibility of you qualifying for an Installment Agreement. For this purpose, if you owe less than US$25,000 in taxes, Form 9645 also needs to be filed. If you can’t afford to pay the tax debt in full in an Installment Agreement, only then will you be considered for an Offer in Compromise.

When applying for an Offer in Compromise you must generally include a US$150 application fee and a deposit of 20% of the amount you offer (for example, if you owe US$50,000 and offer to pay US$2,000, then you have to include one check for US$150 and another one for 20% of US$2,000, or US$400) in the case of a “lump sum” payment option. You can also choose other payment options, but this typically results in your Offer being delayed for up to 12 months.

There are additional requirements for applying for an Offer in Compromise. For a start, all your federal tax returns must be filed…the IRS absolutely will not consider an Offer in Compromise if your returns are unfiled. Also, you can’t be in bankruptcy. You must wait to exit bankruptcy to file an Offer in Compromise, if your tax debt will not be discharged.

If you are a senior citizen living on a fixed income or suffering from a serious illness, then you may expect special consideration from the IRS. Be prepared to show medical records, doctor’s statements, and other supportive documents, even write a letter detailing your special circumstances. As a colleague of mine used to say, ”paint it black” and you’ll stand a better chance of reducing your debt through an Offer in Compromise.

In the event your Offer in Compromise is accepted, you will be required to file and pay all your taxes on time for a period of five years. Also, you’ll agree that the IRS may keep any tax refunds that would have been payable to you during the calendar year when your Offer in Compromise was approved and for the years prior to the Offer.

 Pros and Cons of Making an Offer in Compromise

Having an Offer in Compromise approved is not taking a free ride. The government runs vigorous enforcement programs and, if not careful, your original debt may be reinstated in full, together with all penalties and interest accumulated.

But let’s first talk about the advantages (some of them are…well, obvious):

• You save money…a lot of money, actually. If accepted, the amount you’ll pay under the agreement may be just pennies on the dollar of the original debt.
• After you’ve paid the amount agreed to, any tax lien is released within 30 days and your credit rating will improve.
• Your stress level is reduced while the Offer is pending because all collection actions are suspended during this time.

Are there disadvantages? Sure, I’ve just mentioned one at the beginning of this section…having to adhere religiously to the IRS rules. Here are others:

• Filing an Offer gives the IRS extra time to collect from you. Normally, the IRS has 10 years to collect your debt; after the 10 years are up your debt is canceled. When you file an Offer in Compromise, the collection period is extended by the time the Offer is under consideration, plus 30 days.
• You’ve now provided the IRS with everything about your financial situation, and thus with a roadmap for the Service to take better collection action in case your Offer is rejected.
• And now a biggie…In most cases when the taxpayer has a large debt for which an Offer in Compromise is desired, he/she also owes state income taxes, credit card debt and/or other financial obligations. The Offer in Compromise will not do anything for solving these issues. Therefore, the Offer in Compromise is not a complete solution for all the debt you owe. The only solution to eliminate the federal tax debts as well as other financial problems you may have is bankruptcy. Read hereLINK about dumping your tax debt in bankruptcy.
  • Note than many states have Offer in Compromise programs very similar to the federal program. It is possible to eliminate state and federal tax debts by filing Offers in Compromise with both agencies simultaneously.

 What if My Offer Is Rejected?

This happens very often. It may be that the IRS thinks you can pay off all your debt or it deems the amount you offered to pay too low. I’ve even had Offers rejected on the nebulous grounds of “against public policy,” whatever that means.

Also, a very large number of Offers are returned each year because the forms are completed incorrectly, or the Offered amount, and thus the 20% deposit, is unreasonable. The reason may even be as simple as forgetting to sign the form (it happens more often than you’d think) or not listing your Social Security number. Analyzing, documenting, and submitting an Offer in Compromise is a very mechanical and detailed process, which takes years of experience to master.

In the case when the Offer amount is too low then you can submit another form, with a higher amount. If the rejection is due to a different reason, you will find it explained in your rejection letter. You have the right to appeal the IRS decision within 30 days from the date of the rejection.

 When You Need a Tax Professional…

Always choose a reputable tax professional who has experience preparing Offers in Compromise. Many unscrupulous promoters claiming they can slash your debt to just pennies on the dollar advertise on billboards, late-night TV, and the Internet. These so-called “offer mills,” often with slick advertisements, can take away your money and not live up to the promises they made in the first place. For reviews of some of these promoters, check out the FAQs section LINK of this website.

At Premier Tax & Corporate, Inc. you will find a group of well-trained professionals who will work together with you in order to achieve the best available result for your particular situation. Our enrolled agents and tax attorneys add the most value in planning, preparing, and documenting your Offer in Compromise. Also, just as important, our professionals can determine if you qualify for an Offer in Compromise prior to its being filed, saving you thousands of dollars and months of time. Contact us by phone at (800) 581-6716 or by e-mail at sales@taxreliefguaranteed.com. We are here to help.

When the IRS Makes a Deal with You—the Installment Agreement

By Christian Reeves

Tax Attorney

“I owe the IRS $20,000 because I didn’t have enough withheld from my paycheck over the last few years. I’m working full-time, but I have no savings. Is there any way I can pay off my debt?”

Yes. In fact, almost every client I have worked with in the last 10 years, who has requested an installment, has been approved…eventually. The trick is always the same: getting to a number that both you and the IRS can live with.

If you owe taxes to the IRS, but can’t afford to pay it off all at once, and you don’t qualify for (or can’t afford) an Offer in Compromise, then you can usually set up a payment plan, called an “Installment Agreement” in IRS lingo. The amount you will need to pay each month is based on a number of factors, including:

• Your income;
• Your assets;
• The amount you owe;
• Your actual expenses;
• Your allowed expenses;
• The remaining collection statute of limitations; and
• Whether or not you can afford to pay off the debt in full over the collection statute.

The key to setting up an Installment Agreement is the analysis of these and other factors, and thereby proving to the IRS how much you can afford to pay each month.

Here are the basics of an IRS Installment Agreement.

The IRS will enter a written agreement with you which requires installment payments based on the amount you owe and your ability to pay it within the period of time the Service has to collect from you (the “statute of limitations,” as it is called). The IRS has 10 years to collect from you once you filed a return. When the 10 years are up, the debt is canceled and you get a fresh start. Depending on the amount of tax due, there are different options within the program (see below).

To apply for an Installment Agreement, you usually need to file Form 9465 and Form 433-A or Form 433-F (versions of the IRS Financial Statement, the key form when dealing with IRS collections at any level). If you are self-employed, or own a business, you may also need to file Form 433-B. A few people also need Form 433-D. If your Agreement is accepted, you will be charged a fee of $105 for a new agreement, or $45 for a reinstated agreement.

“What is a ‘reinstated agreement,’” you’d ask.

An Installment Agreement is binding. You must pay the amount agreed-upon on time, every month of the year. If you skip a payment, you usually have 30 days to catch up. If you are not able to get current with your payments, the Agreement is canceled. You may apply for a new Agreement, but your new proposal may be met with skepticism and can even be rejected. Worse, you must provide updated financial information, which may have very dire consequences if your income has increased or the person reviewing your data is less accommodating than the prior agent. If you’re lucky and it’s accepted again, then you’ll have a “reinstated agreement.”

There are two types of Installment Agreements, mandatory and discretionary.

A “mandatory” agreement means that the IRS is required to accept the Agreement you propose if:

• You owe less than $10,000 (exclusive of interest and penalties);

• You’ve filed your tax returns and paid your due taxes on time during the past five years;

• You haven’t entered another Installment Agreement during those past five years;

• You demonstrate that you can’t pay the tax in full;

• You agree to pay the full amount you owe within a period of three years;

• You guarantee that you’ll comply with the tax laws during the term of the Installment Agreement.

If you meet all these criteria, the IRS doesn’t have the right to reject your Installment Agreement. An additional advantage of this type of agreement is that it doesn’t require the same in-depth financial verification that a normal application does.

If you owe more than $10,000, you need a “discretionary” Installment Agreement, which means that the IRS can deny you a payment plan if it deems it unsatisfactory. The IRS has to consider your Installment Agreement and will request you to prepare a Financial Statement (Form 433-A or Form 433-F). If the IRS concludes that more information is needed to evaluate the proposal, then it can request you to provide supporting documents or other proof of income and expense. If not supplied, the IRS can reject your application.

During the processing of your Installment Agreement (until you receive the notice about the result of your application) your stress level will lower considerably as the IRS is not allowed to collect from you. If your IRS installment agreement request is rejected, your case will be on hold for 30 days, giving you time to appeal. If you file a timely appeal, then the IRS can’t touch your property or money during the pendency of the appeal.

How much of my debt will I pay through an Installment Agreement?

The answer is that it depends on your ability to pay, the assets you have available, and the collection statute of limitations. If you have sufficient means then the IRS will require a Full-pay Agreement. This is when you pay your tax debt in full, including interest and penalties, over a period of time.

A Full-pay Installment Agreement may be for a fixed monthly amount, or it may increase at predetermined intervals. In each case, it will pay off the debt during the collection statute of limitations.

An IRS Installment Agreement where you pay a fixed amount each month until the debt is paid in full is easy to understand. An Installment Agreement where your monthly payments increase over time takes a bit of explaining.

As you know, your ability to pay the IRS is based in part on your income vs. your allowed expenses. When your actual expenses exceed your allowed expenses, you are generally given time to modify your lifestyle.

For example, you may be given six months to find a lower-cost apartment. If your current apartment exceeds your allowed rental expense by US$400, the IRS may set up an Installment Agreement that will increase by US$400 in six months’ time.

Another example is where your allowed expenses go down. The most common situation is where your automobile will be paid off, thereby reducing your allowed expenses. If your auto payment is $550 and your car will be paid off in eight months, you might set up an Installment Agreement that will increase by $550 in eight months’ time.

What if I can’t afford to pay off the IRS in full?

In the case you (1) do not have sufficient income to support a Full-pay Agreement, and (2) have no significant equity in assets or cannot sell or borrow against assets due to the fact that selling them will cause an undue hardship, then the IRS will grant a Partial-pay Agreement and you’ll pay off only a portion of your debt within the statute of limitations, with the remaining debt being canceled.

However, if you are granted a Partial-pay Agreement, you must provide updated financial information every two years to prove your continuing financial hardship. If your income has increased, or your allowed expenses have decreased, you will be required to increase your monthly payment.

Still, there’s a third situation. You pay zero dollars. Is that possible? Sure. Basically, when you cannot afford an Offer in Compromise, you have no assets to use to pay the IRS, and your income equals your allowed expenses, you can’t afford to pay IRS anything.

A taxpayer in an Installment Agreement at zero dollars is referred to as being “temporarily uncollectable,” with temporarily being the operative word here. As with a Partial-pay Installment Agreement, the IRS will review your financial situation periodically to see if it can start collecting from you. If your financial situation doesn’t improve and the statute of limitations runs out, then your debt is eliminated. In other words, if you prove to the IRS that you are uncollectable over the entirety of the collection statute of limitations, you have paid nothing and your debt expires.

IMPORTANT NOTE: While you are making installment payments to the IRS, penalties and interest accrue on the unpaid balance. Essentially, you are locked into a late-payment penalty of one quarter of a percent a month plus interest on the unpaid amount. Taken together, the cost comes at around 10% a year. It’s still less than the interest you pay on your credit card, but you need to think before you commit.

What if my Installment Agreement is rejected?

This may happen in one of the following cases:

• The information included in Forms 433-A or 433-B is incomplete or untruthful. If the IRS discovers that you have property or income not recorded on the forms then it will reject your application.

• Your financial statement is signed under penalty of perjury, so it is very important to be truthful and very detailed in the information you provide to the government.

• The IRS deems some of your living expenses unnecessary. If you owe money to the government but nevertheless send your kids to private schools or drive expensive cars, then be prepared to get no deal at all. The IRS expects you to have quite a frugal life while paying off your debt.

• You defaulted on a prior Installment Agreement. It’s a matter of trust…if you’ve once defaulted on your payments then the IRS will think twice whether to grant you a second chance.

If your Installment Agreement is rejected, then you can appeal the decision. If the IRS sees your efforts to pay off your debt then your application may be reconsidered.

What if I need professional help with filing an Installment Agreement?

A reputable tax professional masters the art and science of analyzing your tax situation, as well as your income and expenses, preparing a plan of attack, and then filling out the forms necessary for an Installment Agreement. More importantly, he can determine your chances of obtaining the Agreement in the first place, and will help you plan, prepare, and document your application.

At Premier Tax & Corporate, Inc. we will work together with you in order to achieve the best available result for your particular situation. If you are ready, let’s get started

<LINK Get Started>.

For more information, contact us by phone at (800) 581-6716 or by e-mail at sales@taxreliefguaranteed.com. We are here to help.

Can I Dump My Tax Debt in Bankruptcy?

Bankruptcy and Tax Debts

By Christian Reeves, Tax Attorney

Personal income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. However, special rules apply to tax debts that make it difficult, if not impossible, for most people to dump their tax debt.

Of course the Federal Government put in special rules to ensure they collect your tax debt ahead of any other type of creditor…did you think it could be otherwise?

The bottom line is this: The IRS usually gets to come after you for two to three years before you can discharge your tax debt in bankruptcy. This means you must set up an Installment Agreement, file an Offer in Compromise, or come to some other agreement that keeps the IRS out of your bank account and paycheck until you are eligible for bankruptcy.

Here are the rules. You must meet all four to qualify for bankruptcy.
1. The due date of the return must be from at least three years before you file for bankruptcy.

The tax debt must be related to a tax return that was due at least three years before you file for bankruptcy. The due date includes any extensions.
For example, your 2008 personal income tax return is due on April 15, 2009. If you did not file an extension, you can usually bankrupt those taxes on April 16, 2012.
2. The return was filed at least two years before you file for bankruptcy.
The tax debt must be related to a tax return that was filed at least two years before you file for bankruptcy. This time is measured from the date you actually filed the return.
So, if you file your delinquent 2002 and 2003 tax returns on October 20, 2009, you can usually bankrupt these taxes on October 21, 2011. Your 2003 return was originally due on April 15, 2004, it has been more than three years since its due date, and you filed your returns at least 24 months before declaring bankruptcy.
3. Your tax assessment has to be at least 240 days old.
Your tax debt must have been assessed for at least 240 days before you file for bankruptcy.
A tax assessment generally refers to two types of tax cases:
1. After an IRS audit runs its course and all of your rights to appeal have been exhausted, then the balance due becomes final. This date is the assessment date.
For example, if your 2005 return is audited and the resulting balance due becomes final on March 30, 2007, you must wait 240 days from this date before bankrupting these taxes.
2. When you don’t file your tax return on time and the IRS computers have data indicating that you might owe money to the IRS, the computers will prepare a “substitute for return” on your behalf. After sending a number of notices to your last known address, the amount due on this substitute return becomes assessed and payable.
a. It is important to note that these substitute returns use the highest tax rate, assume you have no deductions, and are never calculated in your favor. If you owe money to the IRS from this type of assessment, you should file accurate returns before dealing with collections or considering bankruptcy.
b. You must file all delinquent tax returns, including the years involving substitute returns, before declaring bankruptcy.
4. The return is not fraudulent and you are not guilty of tax evasion.
The tax return filed cannot have been fraudulent or frivolous and you can’t be guilty of tax evasion. For the sake of this article, we will assume you filed a reasonable tax return and have not been convicted of tax evasion.

Some Tax Debts Aren’t Dischargeable

Personal income taxes are generally eligible to be discharged in bankruptcy. Personal taxes that are the result of payroll tax or sales tax penalties, known as civil penalties, cannot be discharged.

NOTE: All types of tax debt, including civil penalties, may qualify to be eliminated with an IRS Offer in Compromise, paid off over time with an Installment Agreement, or resolved through other IRS programs.

Bankruptcy to Delay

Bankruptcy will stop all IRS collections and put Installment Agreements on hold until your case is completed. Your bankruptcy case may take weeks, months, or even years, and thus provide you time to get your affairs in order.

However, as stated above, interest and penalties continue to accrue. Also, your collection statute is on hold while you are in bankruptcy. If you are in bankruptcy for 24 months, the collection period is extended by the same period of time.

Collection statute: The IRS typically has 10 years to collect from you once a tax return is filed or tax is assessed. Any time the IRS is prohibited by law from collecting, the collection statute is on hold.

Because there are many remedies available to you within IRS programs, bankruptcy should not be used solely to delay collections. Of course, you may have other debts you wish to discharge, and delay may be an added benefit, but it should not be a primary factor in your decision.

The Effect of These Rules

As a result of these rules, most clients who contact us do not qualify for bankruptcy. Most people can only hide from the IRS for a short time before their bank accounts are drained or their paychecks garnished.

Of those who file bankruptcy to eliminate other creditors, most emerge with a larger tax debt and a more aggressive IRS, because interest and penalties continue to accrue. In most cases we see, bankruptcy leaves only the IRS standing…which is the objective of the rules.

Those of you who are not eligible for bankruptcy must face the tax debt head-on and without delay.

Those who file bankruptcy, and are unable to discharge their tax debt, must keep close tabs on their status and contact the IRS with a complete package of financial information once their bankruptcy has been discharged.

Being proactive and contacting the IRS before they knock on your door is the best and only way to prevent a bank levy or wage garnishment from wiping you out.

——————————————————————————–

Premier Tax & Corporate, Inc. does not offer legal advice and does not provide document preparation or filing for bankruptcy petitions. If you are considering bankruptcy, you should consult an attorney in your area.