Delinquent? IRS May Be Willing to Negotiate : Taxes: Program allows settlement of massive bills for a fraction of the amount owed. The effort places greater importance on getting people back into the system.
The way the Internal Revenue Service sees it, a little piece of something is better than a whole lot of nothing.
The mighty, fear-of-God-invoking federal tax agency is ready to negotiate, and local tax experts such as Greg Gose know it.
“The IRS is overburdened. There have never been so many delinquent taxpayers,” Gose, a tax attorney with Staker and Gose in Camarillo, said. “They’re overwhelmed, so they’re eager to deal.”
A program called Offers in Compromise allows tax delinquents to settle massive tax bills for a fraction of the amount owed, which means redemption for many of the more than 10 million people who have dropped out of the tax system and are delinquent to the tune of more than $111 billion.
“It’s a great salvation to people and the response has been absolutely phenomenal,” said David Kaye, an accountant with Sherman Oaks-based Kaye, Kotts & Associates. The firm specializes in tax collection issues and, according to Kaye, has processed more than 400 Offers in Compromise in the past year. “You could owe $100,000 or $1 million and offer $6,000 and you would get very serious consideration.”
The program, which has been around for decades but was updated last year to make it easier for delinquents to settle their debts with the IRS, is part of a new attitude in the IRS placing greater importance on getting people back into the tax system. It gives tax scofflaws a chance to come in out of the cold and start with a clean credit slate.
“The government is more interested in getting money in the bank today instead of money in the bank in the future,” said Rich Davega, head of special procedures at the IRS’s Los Angeles District office. “It’s a sure thing.”
Since the program was revised to make it more attractive, Davega said, the number of people taking advantage of the program in Los Angeles has risen from about 250 in 1991 to about 800 in the past year.
Under the program, delinquent taxpayers can offer the IRS a settlement based not on the amount they owe but on the amount they can pay. Delinquents compute their payments based on their assets and projected earnings over the next five years. The IRS then investigates their finances and either accepts or rejects an offer. Once an offer is accepted, the delinquent pays the IRS in one lump sum.
Darla Morrell, one of Kaye’s clients, fell behind in taxes after a divorce left her holding the bag for corporate taxes incurred by a business she owned with her ex-husband. But under the program, the Cypress woman has offered to pay 10% of the $25,000 in back taxes she owed. She said an IRS agent who visited her home as part of an investigation of her offer told her that he would recommend it be accepted.
“This is a godsend,” said Morrell, who had been regularly paying her personal income tax, but said she wasn’t aware of the corporate tax until long after the divorce in 1987.
The catch to the program is that the offered settlement has to be more than what the IRS could get from the taxpayer by simply seizing the person’s assets, which it can do anyway. Also, the taxpayer must agree to file and pay taxes for the next five years. Failure to do so results in the negation of the agreement, with the IRS keeping the amount already paid and continuing to levy the remainder of the delinquent taxes.
One of the benefits is that the program doesn’t necessarily mean that the delinquent taxpayer will be put out of house and home, as long as he can find the money from somewhere else, such as borrowing it from friends and family.
“The service really doesn’t want to put people out on the street,” said Craig King, senior tax manager of the accounting firm Arthur Andersen, in Los Angeles. “They want their money and they also want to be equitable about it.”
Many tax delinquents, Kaye said, have suffered temporary setbacks, such as a divorce or some financial calamity, and neglected to file. After skipping a year, however, Kaye said, many people “don’t want to file the next year’s return because you’ll alert the IRS to the fact that you didn’t file the year before, and it just snowballs.”
Like many others in the program, Ken Miller, another client of Kaye, had to borrow money from relatives to settle with the IRS. But Miller said it was well worth it to stop the phone calls and the tax liens.
“It gives me a second chance at life,” said the Alhambra man, who borrowed about $11,000 from his parents to settle more than $40,000 in tax bills under the program. “Without it, you have this black cloud hanging over the top of you and you are literally paralyzed.
“You can’t have a checking account, you can’t buy a car. . . . It’s having someone looking over your shoulder constantly and you can’t lead a normal life.”
Under the old terms of Offers in Compromise, tax experts said, the program asked for too much from delinquents and offered too little in exchange, never allowing tax delinquents to get completely free of their tax obligations.
“They would ask for everything you had and then ask for a percentage of your income for what was essentially the rest of your life,” Gose said. “And it never seemed like the IRS was willing to compromise.”
The program now, Gose said, is ideal for those who “owe a lot and don’t have anything.”
The best time for the delinquent taxpayer to go through the program, tax specialists said, is when he or she is broke. If they wait until they are back on their financial feet, it’s harder to negotiate a deal, they said.
Since tax laws tend to change--sometimes dramatically--from year to year, Gose said, “there has never been a better time to do it.”
