Everyone has seen the commercials. They used to play only late at night, but recently they can be found almost any time of day and on almost any network. First, they scare you with the potential power of the IRS – liens, levies, wage garnishments. Not to say that the IRS does not have this power, but they only use it as a last resort. Next, they tell you if you owe $10,000 or more you can avoid all these problems by settling your tax case for “pennies on the dollar.”
The truth is, settling a tax debt for less than what is owed is not always an option, and is not nearly as common (or easy) as these commercials make it appear. When faced with a large tax debt, you should do a few things. First, you must understand under what circumstances the IRS will consider settling a tax debt for less than the full amount due, and if this is a realistic option for your specific situation. Next, you must make sure you do not pay unnecessary fees and you hire a tax professional that will put your needs first and be honest about your resolution options.
Do you qualify?
The resolution option these commercials are referring to with the “pennies on the dollar” tagline is called an offer in compromise. An offer in compromise is essentially an offer to settle your tax debt for less than the total owed. The key to understanding how this works is to know that the IRS reviews an offer in compromise on an objective basis. Contrary to what many people believe, a tax professional cannot call the IRS and negotiate a lower debt on mere good faith or bargaining skills. The IRS looks at all relevant financial factors and determines if the offer in compromise will provide them with the greatest anticipated collection on the debt.
For example, if a taxpayer owes $24,000 and the financial information shows the taxpayer can afford $1,000 per month in disposable income after expenses, the IRS will require monthly installments for about two years to collect the full amount of the debt, rather than settling for a lesser amount now. However, if a taxpayer owes $24,000 and the financial information shows the taxpayer can only afford $25 per month after allowable expenses, it could be a different story. In this case, it would take the IRS roughly 80 years to collect the full debt using a monthly installment agreement. A lot of things can happen in this amount of time, not the least of which is the statute of limitations possibly closing on the time the IRS is legally entitled to collect the debt. Therefore, a taxpayer in this scenario could offer a lower settlement amount, generally paid over 6 months or less, which is borrowed from a friend, family member, or some other source. If the IRS believes this offer represents the best opportunity to collect on the debt, they will accept the offer.
Another factor the IRS will consider is whether you have available assets to pay the debt. For instance, if in the second scenario the taxpayer only has $25 per month to spend but has $50,000 in a retirement account or $25,000 in a savings account, the IRS will ask that these resources be used to pay the debt. The IRS will also consider things such as past earnings, potential for future earnings, licenses the taxpayer can use to generate revenue, age, health and any other relevant factor. Overall, the determination is always made based on what will allow the IRS to maximize collection on the debt.
Avoiding Unnecessary Fees
As you can see, not everyone will qualify for an offer in compromise. Tax professionals can rarely be certain, but in many cases a good tax professional can determine before an offer in compromise is even submitted if it is a feasible option. If it is not a realistic option, the tax professional should suggest other options to resolve the tax debt, such as an installment agreement (i.e. payment plan). This is where the determination of qualifying for an offer in compromise can lead to unnecessary fees. You should ensure when paying fees or a retainer that the analysis provided will be a comprehensive analysis of all viable options for your tax debt. You do not want to pay to find out you are not a good candidate for an offer in compromise, and then have to pay an additional fee to have your facts reexamined to determine another option. The tax professional should review your information, determine the possible options, then discuss these options with you, along with the associated risks, so you can make an informed decision.
Of course, offers in compromise do get denied and even the best tax professionals cannot predict with certainty the likelihood of success for every set of facts. Good tax professionals can merely give their opinion if you are a good candidate for an offer in compromise and then leave the decision to you if the cost is worth the risk. You should be weary of a tax professional that requires large initial fees to simply review your information or makes claims of a 100% success rate. In the end, you need to have as much information as possible to make an informed decision, and should work with your tax professional to choose the best option for you.
Hiring a Tax Professional
Hiring a competent and dedicated tax professional can be a real challenge. However, it is imperative that you make every attempt to ensure you are hiring a competent and dedicated tax professional. Television commercials and mass marketing companies using the phrase “pennies on the dollar” may very well be legal businesses with qualified professionals, however, recent history suggests you should be cautious when hiring these companies. Companies such as JK Harris & Company, Roni Deutch, and TaxMasters have all run into legal problems. There are extensive articles about the deceptive practices used by some of these companies and the lack of personal care and service provided to clients. Determining the best option for resolving a tax debt is a skill that not only requires technical expertise, but also a familiarity with the unique facts of a taxpayer’s personal situation. The larger an organization, or the more layers of people involved, the less likely the final decision maker will be intimately involved or knowledgeable on the specific facts.
Additionally, an offer in compromise is not a quick or simple process. From the first meeting to the final determination can take many months, if not more than a year. During this time, you need to be cautious of a few things. You will want to make sure the collections department at the IRS understands an offer in compromise has been filed to ensure that collection activities are stopped while the offer is under consideration. You will also want to make sure your tax professional is monitoring your overall tax situation to make sure nothing happens in the interim that could affect the offer. Lastly, you need to be prepared to work closely with your tax professional to respond to requests for additional information or questions the IRS may have. When filing an offer in compromise your fees should not simply cover the paperwork to be completed and submitted, but instead, your fees should cover a comprehensive plan which includes carrying the offer from beginning to end and addressing all points in between.
How to avoid the pitfalls
Resolving your tax debt is not as simple as calling a phone number from an advertisement. Only certain financial situations will qualify for an offer in compromise, and even then it is more complex than simply filling out a form and dropping it in the mail. Therefore, it is imperative that you hire a qualified, competent professional who is going to put your needs first and do what is best for you in order to resolve your tax issue.
Before paying fees or a retainer, make sure you discuss with your tax professional in detail how your case will be resolved, including options if it is determined you are not a good candidate for an offer in compromise. Also, prior to choosing an offer in compromise as the best option, the tax professional should give feedback on their analysis of whether you are a good candidate or if there is potentially a better (or more realistic) option to resolve your tax debt. As mentioned, this is not an exact science, but a reasonable conversation and discussion of the process, your specific facts, and your options, can give you the information needed to decide if the costs and risk of denial are worth it.
Choosing the right tax professional is difficult. A good starting point is to seek recommendations from family and friends or other trusted professionals. You should also review credentials online, if available, and search for any reviews or comments. Of course your final decision should always be made after meeting with the professional to make sure you are comfortable with the individual and their process for handling your tax debts.
Tax debts can be frightening and intimidating. Having good information and making informed decisions can make the process less daunting and will help ensure that you do not fall prey to deceptive tag lines.
Contact Hone Maxwell LLP today for an assessment of your case.