Settling With the IRS: Your Questions Answered
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A recent series on applying for an offer in compromise triggered a deluge of reader mail. An offer in compromise is an agreement to settle a tax claim for less than what’s owed. In this column, I'll address two of the most frequently asked questions: one on selecting the right tax pro to help with your offer and another on qualifying due to an illness or disability.
Question: I owe about $75,000 in delinquent taxes and I'm self-employed, making pretty good money. But with a wife who doesn't work and a couple of kids, I don't think I'd ever be able to repay this tax liability. I always hear ads about paying pennies on the dollar, but I wonder if I qualify for this. How much should it cost to have a tax person make an offer in compromise for me, and how do I know if they are any good or not? -- Steve
Depending upon the company and the area in which you live, you may find a wide variety of fees for preparing an offer in compromise. My advice is to be very careful in selecting a tax pro to handle this for you. Because of confidentiality requirements, it's difficult to acquire references. If you know of someone who was successful in compromising his tax liability, you may want to find out who represented him or her. If you don't, you'll have to rely on your own judgment. Ask questions: How long have you been in business? Do you have an area of specialty (hopefully representation issues is one area)? How many offers have you presented? How many were successful? What is your fee? You want an experienced pro, one who is direct and has the ability to negotiate.
In my experience, the tax pros who blast a lot of TV and radio ads are often the ones to stay away from. Too many times I have heard "They took my money and never got back to me!" or "I paid a huge fee and then I was rejected. I found out I wasn't really qualified." A bona fide tax pro will qualify you first to determine if you have a shot in hell of being one of those in the 24 percent accepted category.
You say you may have too much gross income. That is only part of the equation. The IRS uses a set formula to determine an acceptable offer. I provide the formula in my previous column on calculating an offer in compromise but a good tax pro knows how to extract the data for the variables of the formula that the typical taxpayer may not be aware of.
Question: With interest and penalties, I believe I owe $90,000 of '06 and '08 federal taxes, plus year-to-date '10 taxes. I have a couple illnesses (you mentioned this in article). One is seriously debilitating and periodically impacts income, and the other is terminal.
I spoke to an IRS agent who said they don't care about the illnesses. They are inclined to put liens on everything (I have nothing--just a car and an almost-empty bank account). Then they will attempt to collect as much per month as they think I can pay. Later they will renegotiate if I'm sicker.
This agent said OIC is for remaining penalties and interest or when one spouse dies, leaving hardship, and does not apply to my situation.
What do you think? -- James
I think you ran into a bully. Most IRS agents are sympathetic and willing to work with taxpayers who voluntarily come forward to resolve their delinquent tax liabilities.
The logic behind an offer in compromise is this: If it doesn't look like there's a snowball's chance in hell of collecting the debt (including the continually mounting penalties and interest) in the taxpayer's lifetime, the IRS is inclined to consider an offer in compromise.
I'm surprised the IRS agent you spoke with didn't suggest you go for it. After all, unless there's something you didn't tell me (like you have an extensive collection of van Goghs valued at $10 million), you sound like an ideal candidate.
A surviving spouse in a hardship situation is an ideal candidate, but not just for the accrued penalties and interest. In fact, when you apply for an OIC on form 656, you list the tax years you want to include in the offer. The tax, as well as the penalties and interest, are compromised in an accepted offer.
Other ideal candidates include: unemployed taxpayers with no prospects and a looming statute of limitations on the tax liabilities in question, low-income or unemployed surviving spouses--especially those with children, elderly people with low income and no assets, and self-employed individuals with a track record of low income. Pretty much anyone with no assets, no or low income, or mental and physical disabilities has a pretty good shot at compromising their tax bills.