IRS Backing Off Making Deals
Want to make a deal with the Internal Revenue Service to settle old tax debts for “pennies on the dollar”?
You’ve got plenty of company.
Lured by television and radio advertisements that make these deals sound like slam dunks, more than 100,000 taxpayers ask the IRS each year to settle back-tax debts at steep discounts through the agency’s “offer-in-compromise” program.
Increasingly, the IRS is saying “no.”
The IRS established the offer-in-compromise program in 1990 to allow economically strapped taxpayers to make a fresh start. Getting something from these taxpayers, the agency reasoned, is better than getting nothing.
The IRS has set up hurdles designed to weed out those who are simply trying to dodge taxes, and they seem to be working. About 32,000 offers were accepted in the 2000 fiscal year, but just 19,543 were granted in the 2004 fiscal year ended Sept. 30, according to the IRS.
“We have done a lot over the past year to try to enhance the program and get people in who are eligible,” said Cheryl Sherwood, director of collection policy at the IRS in Washington. “But, there are a lot of people who are applying for offers who just don’t qualify.”
The IRS recently revamped its application to make qualification standards more clear, and last week it warned taxpayers to steer clear of “too-good-to-be-true” promises from promoters.
Notably, there are many ways to resolve tax woes -- and many of them are better options for the taxpayer than an offer in compromise, said Rita Veen, a tax preparer in Castaic who has prepared dozens of such offers.
Submitting an offer in compromise when there’s a better option is a costly mistake, she added. Most tax professionals charge thousands of dollars to submit these offers because they require detailed financial statements and budgets for the IRS. The fees paid to professional preparers are rarely, if ever, returned -- even if the offer is rejected.
Here are some questions and answers on offers in compromise:
Question: Under what circumstances will the IRS accept these offers?
Answer: There are two basic routes to “yes.” The most common way is when the taxpayer can prove inability to pay the amount that’s owed by liquidating assets or paying over time. In rarer cases, the IRS will accept a compromise when taxpayers contend they owe nothing at all.
Q: So is this a way to dispute a tax bill?
A: It can be, but a taxpayer who genuinely believes an IRS assessment is inaccurate or unfair usually is better off contacting either the Taxpayer Advocate’s office or a tax attorney. That’s because the offer-in-compromise program is about negotiating the amount owed, not arguing the merits of deductions.
Q: Who should apply for an offer in compromise?
A: Taxpayers who want to be compliant with tax laws but cannot afford to pay a back-tax bill. The IRS will expect the taxpayer to liquidate assets and pay as much as possible from monthly income before accepting an offer, so these offers should not be made in an attempt to get a tax bargain. They’re only for those who have no other options.
It’s also worth noting that the IRS will investigate every offer thoroughly, Veen said. Taxpayers are required to submit a detailed statement of assets and debts, and a detailed monthly budget to show the IRS how much the taxpayer can conceivably pay from equity and how much from income.
Failing to mention significant assets will cause rejection, while missing even worthless assets may delay the process, she noted. Veen had one offer held up because the IRS found DMV records for four cars belonging to her client. Her client hadn’t listed them on his financial statement because they were practically worthless, she said.
But it wasn’t until after Veen sent photos of the junk cars that the IRS was willing to accept that they had no resale value.
Q: Are there other options?
A: Yes, filing for bankruptcy is one alternative. Another is agreeing to an installment plan to pay the debt off over time.
Q: How many years can you take to pay off the debt with an installment agreement?
A: Until recently, the back taxes had to be paid off within 10 years. A law signed by President Bush this month changed that, allowing the agency to stretch payment plans over longer periods and to accept partial payments. This is a good option for people who don’t want to liquidate assets -- such as a home or retirement plan.
Q: When would bankruptcy be advisable?
A: When making any payment to the IRS is impossible, or when making the payment to the IRS would throw the rest of your financial life into a tailspin. Bankruptcy also may be necessary if you can’t come to terms with the IRS over how much you can pay under an offer in compromise, Veen noted.
However, it’s smart to consult a tax or legal advisor before taking this option, both because bankruptcy is a major step that has many repercussions and because some tax debts cannot be wiped away, even in bankruptcy.
Q: Where can I get more information on offers in compromise?
A: From the IRS website at www.irs.gov. Type “offer in compromise” into the search bar on the left of the screen and you’ll find forms, news and a 62-page booklet explaining how to apply.
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Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past columns, visit latimes.com/kristof.
