I Owe the IRS. Will They Settle for a Lesser Amount in an Offer in Compromise or Do I Need an Attorney? – Diana

“Dear Jim,

I owe the IRS $26,000. There were some years I failed to file taxes and some years I filed and owed, but they said I never filed, I have the copies. I have all the information except one year.

My question is will the IRS settle with me for a lesser amount or do I need to hire an attorney?

Diana”

Dear Diana,

Thanks for your question. The question of whether you can settle for less depends on your situation. Normally, most people do not qualify for a tax relief settlement, called an Offer in Compromise (“OIC”), but many do qualify for penalty relief if you can show reasonable cause. I am not ruling out an Offer in Compromise, however, it is a financial formula. I am assuming that ALL of your required tax returns are filed- if they are not, that is the first task to complete before you can use any balance due option with the IRS.

Here is the formula for an OIC:

To qualify for an Offer, your reasonable collection potential (“RCP”) must be less than your current debt owed.

RCP is computed as:

Net equity in assets (at quick sale value- which is usually 80% of market value) plus
Your monthly disposable income (limited by the IRS allowable living expense standards) times
the months remaining on your collection statute of limitations.

Because the collection statute is 10 years from the date of assessment and your debt is recent (determined, for most, by the date you file), you have many months left for the IRS to collect. But, even if you do not qualify for an OIC, there may be better alternatives based on your finances.

I want to give you two warnings about an OIC:

1. If you qualify for an OIC, you may not be able to pay it. Because an OIC requires you to put 20% of the amount as a down payment (there is an exclusion if you are in a financial hardship), you may be worse off financially if you submit an OIC and cannot pay the amount in full.
2. The net equity in assets assumes that you did not transfer any property of value outside of your name after the tax was assessed. About 20% of people who think they qualify end up not qualifying because of these past “dissipated assets.” If you have transferred assets out of your name, you will need to include the value in the equity in assets for the RCP calculation.

However, let me explain what might be better alternatives:

1. Consider penalty abatement for the late filing penalties: from your background, you indicate you have proof of timely filing in the past- if you can prove to the IRS that you filed on time, you will substantially lower your penalties for any years that you owed a balance due (the savings will be at least 25% on a return filed over 5 months or more late). Penalty abatement is much more frequent than an OIC. You should pursue this option through normal IRS channels by sending a request for penalty abatement to the address that you filed your late returns. If you do not get any action (and chances are you will not), you should pursue your penalty abatement request with the IRS Taxpayer Advocate Office. You can get your local office at irs.gov.
2. Consider penalty abatement for reasonable cause for any late payment penalties: while you get into a payment agreement or other arrangement to pay your back taxes, you should request that the IRS abate your penalties if you can prove you had “reasonable cause” for late filing and late payment (a long standing medical or hardship are examples of reasonable cause). Again, if you have cause, ask for this in writing and be diligent about not accepting “no” for an answer with the IRS. This could also save you hundreds in penalties.
3. When in doubt, if you can afford it, get into a payment plan: Consider all payment options based on your ability to pay. The IRS will want your monthly disposable income, based on their allowable expense standards (a similar calculation as the OIC). If you are able to get your balance below $25,000 by penalty abatement or paying to under $25,000, you should qualify for a “streamlined installment agreement.” This agreement allows you to pay the balance, if you owe $25,000 or less, in 5 years or less. You can call the IRS at 1-800-829-7650 and get this yourself in about 15 minutes.

Words of caution before you pursue hiring someone. You may want to see if you have the ability to do this yourself. Very little “negotiating” goes on to get an OIC or penalty abatement- it is mostly about getting game plan and following through on it.

I hope this helps.

Your servant,

Jim

Jim Buttonow is one of the resident debt experts here at GetOutOfDebt.org that helps people for free. Jim is a licensed CPA who spent 19 years with the IRS coordinating large compliance teams of IRS agents and specialized personnel. In the last 5 years, Jim has invented consumer and practitioner software and treatises on how to address many different tax issues. He has also represented many people before the IRS examination, collection, filing, and appeals functions. He currently assists taxpayers on an active pro bono tax practice aimed at serving people in need. He can be reached at IRSMind.com.

If you have a tax question you’d like to ask just use the online form. I’m happy to help you totally for free.