Agents Help Tax Debtors Get a Second Chance : Delinquency: Specialists aid in setting up IRS payment plans, as well as working out compromises to pay less--sometimes much less--than is owed.
John Knight’s clients run the gamut. Drug addicts trying to come clean. Corporations in the hole. Lawyers living beyond their means. And one man reduced to hiding out in his parents’ garage.
All had one thing in common: The IRS wanted them. But thanks to the agency’s new, more lenient attitude toward deadbeats, tax specialists such as Knight have found plenty of business getting such folks off the hook.
Knight, 56, is a retired Internal Revenue Service employee who has set up shop in Van Nuys. His delicate task is negotiating with the IRS to set up payment plans, remove disputed charges, or settle outstanding tax debts for less than the agency is owed. The job requires the right attitude toward IRS agents: “I like them,” Knight said.
That’s not as hard as it sounds these days. The agency that once ruined lives over delinquent taxes is now offering many debtors a second chance. More people are being allowed to repay the IRS in installments. And the truly desperate are finding they can sometimes strike a deal--known in IRS lingo as an “offer in compromise.” Such programs have created lots of clients for Knight and others--especially in the San Fernando Valley, where recent layoffs have left many taxpayers in tough financial straits.
Knight’s clients include Van Nuys psychiatric nurse Ed Trapp. Trapp, 44, offers an extreme example of how unpaid taxes can make a life unmanageable. In the late 1980s, although he was earning $36,000 per year, Trapp failed to pay about $3,000 in taxes per year for three years.
Penalties and interest on delinquent taxes vary, but they can often increase the amount owed by 20%--and in extreme cases, the cost is much higher. Trapp tried to pay his mounting tab in installments of $300 per month. But with rent, child support and other bills to pay, he soon fell behind. Meanwhile, “the bill just kept getting bigger,” he said.
Trapp’s real nightmare began when the IRS froze his paychecks and bank account. “I’d go to pick up my paycheck and get a pink slip that said that they’d seized it,” he said. Depressed and desperate, Trapp quit his job--which yielded no cash anyway--and began living in his parents’ garage. He cashed his unemployment checks at check-cashing outlets and paid bills with money orders bought at a grocery store. “I was anxiety-ridden every day, every time I thought about it,” he said. “Just the thought of those three letters, I, R and S.”
Finally--seven years after his tax troubles began--Trapp called John Knight. By then, his delinquent tax bill had grown to about $18,000. For a special fee of $350, Knight prepared an offer in compromise to the IRS on Trapp’s behalf.
In December, the IRS accepted a $4,000 settlement. Trapp borrowed the money from family members to buy his freedom and vowed to pay his future taxes on time. Today, he is back working in his field. He has a bank account, a credit card and soon plans to move out of his parents’ garage. “I’m extremely relieved,” he said.
The IRS’ new leniency stems from concern over the so-called “tax gap,” said Keith Kimball, spokesman for the IRS’ district office in Los Angeles. Nationally, the IRS succeeds in collecting only about 85% of taxes it is owed. That missing 15% represents $156 billion in unpaid taxes in fiscal 1994--and scores of folks driven underground by their tax debts.
Hoping to collect at least a portion of this money, the IRS revamped the offers-in-compromise program three years ago and began publicizing it. The program allows those with virtually no hope of ever paying their tax bill to settle for less than the full amount. Settlements vary, but accountants say the rule of thumb is that the offer must be at least as much as the sale value of the applicant’s assets. Applicants must also demonstrate that their present and future income is insufficient to pay off what they owe.
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The new policy has resulted in a dramatic increase in the number of offers received and accepted by the IRS, said Kimball. In the early ‘80s, the Los Angeles office, where Knight used to work, dealt with only about 150 such offers per year, and the IRS agreed to settle cases only about 20% of the time, said Knight. By contrast, in fiscal year 1994, the Los Angeles office received 1,785 offers, and the acceptance rate is running at about 43%, according to Kimball.
The new spirit of compromise has replaced what Knight calls “the days of knock and lock.” As an IRS revenue officer in the ‘60s, Knight explained, he would give delinquent taxpayers 24 hours notice before locking them out of their properties. IRS workers carried metal clamps called key blocks for this purpose. Knight still keeps a key block in his office to show clients. “I tell them this is what’s in store,” he said.
Knight handles about 40 clients at a time. He boasts he “still has the mentality of a revenue officer”--and he’s kept the no-nonsense demeanor of one. It’s sometimes hard to tell with whom he feels more at odds--the IRS or the people he represents. His clients include self-employed professionals who fell behind on their tax estimates, people who invested in phony tax shelters, and a few who should know better: lawyers and accountants who “sneak in here like they are coming into a porno theater,” he said.
As what’s called an enrolled agent, Knight is certified by the IRS and charges anywhere from a few hundred to a few thousand dollars per case, depending on its complexity and how much is owed. Saroj Sharma, president of the San Fernando Valley chapter of the California Society of Enrolled Agents, said that her members typically charge fees of $60 per hour and more to represent clients. Knight said he usually asks for some money up front from his clients, because “if they are not afraid of the IRS then they are not going to be afraid of you.”
Knight is not alone in concentrating on troubled taxpayers. Sherman Oaks accountant David Kaye also specializes in people on the IRS’ wanted list. His firm, Kaye, Kotts & Associates, has grown from five offices to 12 in just two years, thanks to high demand for the service, he said.
Among Kaye’s clients is Katherine Kerr, a 47-year-old Oxnard woman. Kerr’s divorce in 1982 left her a single parent with $23,000 in debts to the IRS. The debts stemmed from unpaid payroll taxes at a restaurant she owned with her former husband.
Kerr works full time managing a retail clothing outlet and earns $10 per hour. For 12 years, she struggled to make installment payments on the debt--”every month sweating that if I didn’t have enough they would come and lock me up,” she said. A year ago, Kaye’s firm helped Kerr prepare an offer in compromise. She was permitted to settle her debt, which had grown to $32,000, for a mere $3,000. The deal “literally saved my life,” said Kerr.
Despite such stories, Kimball, the IRS spokesman, was hesitant to call the offers-in-compromise program a success. The U. S. Treasury received $281 million from accepted offers in compromise in fiscal 1994. But to get that, $1.6 billion in outstanding tax debts were forgiven, he said.
Supporters say that’s money the treasury was unlikely to see anyway. But the IRS’ Kimball said his agency is still struggling to find a balance between being merciful and being fair to those who pay their taxes in full and on time.
In short, if you failed to pay your taxes by yesterday’s deadline, don’t count on an easy way out, say local tax experts. “Almost all my clients have heard about the offers in compromise, and they all want it,” said Dan Dumas, a Burbank accountant. “But of 10 who want it, one qualifies.”
Encino accountant John D. Stoller agreed: “If you are 80 years old with a terminal disease and no assets, it’s really easy,” to get a settlement offer approved, he said. Otherwise, plan on paying.
Like many San Fernando Valley-area accountants, Stoller reports he is doing more offers in compromise and installment agreements for people who can’t pay. But as a former IRS agent himself, he says he still views these programs as last resorts. “A lot of my job is still trying to get my clients to pay their taxes,” he said.
