IRS Debt? 7 reasons bankruptcy is often used to deal with it

idea_lightbulb_cartoon2-thumb-375x491-53213IRS Debt and Bankruptcy

No one likes bankruptcy, except bankruptcy attorneys.  For most Americans, it remains a very negative process.  In fact…many of our clients refuse to even consider bankruptcy during a first meeting.  I don’t blame them.  It is interesting however, how many of those who are initially so opposed, change their minds once they see the potential benefits.

Why is bankruptcy such a mind changer?  Some quick background:

The Bankruptcy Code, which is updated occasionally by Congress, reflects our Nation’s desire to provide a fresh start for debtors. The Code attempts to create a system that forces those that can afford to pay their debt out, and allows those that can’t…in.

This balancing process between “who should and who shouldn’t” is applied to tax as well. Certain types of tax debts are considered so important that the bankruptcy code doesn’t allow for them to be wiped away (discharged). “Trust fund” taxes like taxes that are withheld from an employee paycheck to be forwarded to the government by the employer, are an example.

Income taxes don’t warrant the same concern, and therefore the bankruptcy code provides for their discharge in specific circumstances. Those circumstances are as follows:

  • The tax return had to be filed more than two years before the bankruptcy filing.
  • The tax return had to be due for filing more than three years before the bankruptcy filing.
  • The tax debt had to have been “assessed” or entered into the IRS record as a debt, more than 240 days before the bankruptcy filing
  • The taxpayer didn’t file a fraudulent return.
  • The taxpayer didn’t “willful evasion”.

These dates are found in the Bankruptcy Code sections 507(a)(8)(A)(i), 523 (a)(1)(B) and 507(a)(8)(A)(ii).Of course you realized while reading this list that nothing is ever that simple, and for a number of reasons you are right.

  • The first reason is that in an effort to be fair to the debt collectors at the IRS, the Bankruptcy Code requires that the clock stop ticking in certain circumstances. Circumstances like time spent in a previous bankruptcy, collection due process appeal, or offer in compromise.  It is not always easy to calculate these time periods as a result. Also, the taxpayer has to wait for these time periods to pass. In the meantime, the IRS is aggressively looking for money.

So if the date calculations are complex, and the tax lien can negate many benefits of the discharge…why such a mind changer?   The primary reasons:

1.  The Bankruptcy Code controls the Tax Code

If the taxpayer meets the various bankruptcy qualification criteria and the tax debt meets the requirements for discharge, the IRS has little say in the matter. This isn’t a subjective decision on it’s part. It has to do what is told. If it doesn’t i.e. it tries to collect the debt when it wasn’t supposed to, the taxpayer can sue. This is as opposed to trying to deal with the IRS directly in an offer/installment/other situation where the IRS is the decider of facts and the applier of the law.

2.  Bankruptcy can be a “one-stop” shop

Many people with serious tax debt have other serious debt as well. If planned well, bankruptcy can deal with all of the problems at one time and some that many don’t realize were “fixable”. Not only can income tax and consumer debt be dealt with, but cars can be “crammed down” to market value, homes saved, and assets protected. All legal options provided by the tax code, deal with the tax debt only.

3.  The lowest debt settlement program is the no asset chapter 7 bankruptcy

Where the bankruptcy trustee in a chapter 7 bankruptcy is unable to collect any assets for liquidation and distribution to creditors, which is a common occurrence, the IRS will get nothing as well. This amount is always less than the settlement amount in an offer in compromise.

4.  Offers in Compromise don’t work for many

The vast majority of offers in compromise filed in the U.S. fail. There are a number of reasons. Some of them are:

a.  Legal standards exist that govern how the IRS should view the offer to compromise the debt, but they are…a bit loose. Loose enough that the IRS is able to inject a great amount of subjectivity into the process. Bankruptcy on the other hand, creates quantifiable results based on objective criteria. Offer in compromise results are all over the place.

b.  These legal standards have a lot to do with what the IRS thinks you can afford to pay toward the debt over time. The starting point for household budgets is very low and is usually much lower than the taxpayer’s actual budget. The IRS doesn’t have to consider certain budget items at all, like consumer debt payments and savings plans. This usually results in a large discrepancy between what the IRS thinks the taxpayer can afford and what the taxpayer thinks he can afford.

c.  Failure is costly. Most need legal representation and that costs money. Most/all of which doesn’t get refunded when the offer fails. Most have to pay some large amount to file the offer (20% of cash offer amount, or monthly payments based on the offer amount) which isn’t refundable when the offer fails. The debt continues to grow in the background thanks to interest, and when the offer fails all the new debt is waiting with hat in hand and even a smile.

5.  Higher income taxpayers don’t always have to “qualify” for a chapter 7 bankruptcy

There is an exception in the bankruptcy code to the requirement that all who file chapter 7 bankruptcy must pass a test of ability to pay debt. Where the majority of the debt is tax debt, this rule doesn’t always apply. As a result, many who wouldn’t be able to even hope for an offer in compromise, are able to use bankruptcy to discharge the debt.

6.  Many with serious tax debt don’t have large assets

Most taxpayers with serious tax debt, will see the IRS record a Notice of Federal Tax Lien. As mentioned above, that lien attaches to all assets. When the bankruptcy is filed and the underlying debt is discharged, the tax lien remains and is in essence a secured debt. It’s value is based on the value of the assets on the date of the bankruptcy filing. If the taxpayer owned a home that was “underwater”, a car with $5000.00 in equity and some furniture, the lien is almost worthless and the IRS will often remove it.

7.  Chapter 13 bankruptcy is often a “cheaper” solution then an installment agreement.

The taxpayer may not be a good offer in compromise candidate, and may not be a good chapter 7 candidate because the tax debt is not the greatest part of the overall debt or for another reason. The taxpayer is left with two options: An installment agreement to pay the tax over time and wait out the statute of limitations period, or a chapter 13 bankruptcy.

The installment agreement amount is often much higher than the taxpayer would like. The chapter 13 bankruptcy payment on the other hand, can be based on friendlier budget criteria. In many cases the taxpayer can deal with all of his debt with a smaller monthly payment than the IRS was requiring to deal with the tax debt alone.

The Offer in Compromise isn’t over when it’s over

ber0-005The IRS Offer in Compromise isn’t over when you get the letter approving settlement with the IRS.  Don’t get me wrong, the Offer in Compromise (OIC) can be a great solution for some people with IRS debt. But unlike a chapter 7 or chapter 13 bankruptcy case, an offer in compromise isn’t over when you may think it is, it isn’t even over when you’ve paid the agreed upon amount.

What?!!!   It isn’t over when it’s over?  No, it isn’t.  Or as Yogi Berra once said, “The future ain’t what it used to be.”

Unfortunately, IRS rules require that you do a few things to ensure the settlement remains in place.


You have to file your tax returns every year for 5 years and you have to file them on time.  Now…if you don’t file them on time, the IRS won’t just pull the rug out from under you.  It will send you a warning letter before it does because it doesn’t want to waste the time and effort it put into the offer either.  But in any event, if your offer in compromise has been paid, you should triple check the calendar each year to make sure you have filed your return.


The corollary to the Tax Filing Requirement is the Tax Payment Requirement.  No longer can you wait until after tax day to figure out how you are going to pay the tax debt for the year.  You must make sure that you are withholding or saving enough throughout the year to guarantee that you won’t have tax bill that you can’t pay when the return is filed.  Again, the IRS won’t just kick you out…it will or should send a letter.  But don’t risk this.  Keep withholding correctly and make sure that you have stored enough money away to pay the difference.


The relief you felt when the offer was accepted will be lessened when the IRS keeps that next tax refund and applies it to the debt.  What?  Yes, even though the amount has been accepted the IRS will and can keep the net tax refund for the year in which the offer was accepted.  Example:  On September 15, 2015 the IRS send you the acceptance letter, in October you file your 2014 return that was on extension and your refund is $3500.00 because you have done such a great job of withholding during the 2014 year.

A bit of advice: Check to see if you are over-with-holding.


The IRS won’t release that lien until the offer amount is paid in full.  Some people are on payment plans that can last as long as 24 months and under the mistaken impression that the Offer settlement letter will be the IRS’ starting gun for release of that or those liens.  They won’t do it.  You have to pay the offer amount in full.


Sometimes the IRS makes mistakes and doesn’t change the books to show a zero balance and it doesn’t release the lien(s).  You will have to follow up after you have made the last payment to ensure these two things have happened.  A good place to start is by looking at the IRS’ account transcript for each year in question and than contact the IRS to follow up on ensuring all is correct.

5 reasons not to file a perfectly good IRS Offer in Compromise

From Point A To Point BThe IRS Offer in Compromise program, the one you hear about on radio and TV…really exists.  It actually works too. Many people settle tax debts with the IRS every year.  But…it isn’t for everyone.  In fact, most Offers in Compromise filed with the IRS are rejected for a number of reasons.  You can read more about that here.

Just as important…many who qualify for an Offer in Compromise choose not to file one.

Strange I know… but it happens all the time, and here are 5 common reasons why.

Tax and other debt

If you have old tax debt and much of it is “dischargeable” in bankruptcy AND you have other debt that needs to be dealt with in bankruptcy, then an Offer in Compromise may be a waste of time and money.

This isn’t true in every case, and there are reasons why people who have tax and other debt can’t use bankruptcy without some negative side-effects, but it is usually the case that bankruptcy makes more sense.

Not a great candidate for an offer in compromise but a good candidate for a bankruptcy

What if a taxpayer had a large tax debt as a result of under-withholding for several years and the total tax debt is $150,000.00.  The IRS is threatening collection.  He can’t pay it in full over the time left in the statute of limitations for collection and his best offer in compromise number would be $25,000.00.  Assume as well that he would qualify for a bankruptcy and that the bankruptcy would discharge his entire tax obligation.

He doesn’t have access to the $25,000.00.

A bankruptcy may make more sense.

Difficulty remaining in “compliance”

In order for an Offer in Compromise to work permanently, the taxpayer has to remain in absolute compliance with the tax code for a 5 year period after acceptance of the Offer. If a tax return is late or if a new debt is incurred, the offer is revoked and the complete amount of debt with it’s new interest becomes collectible once again.

One of the lesser known aspects of an Offer in Compromise is that in order to be ‘permanently’ accepted, the taxpayer must remain in complete compliance with the tax code for a period of 5 years after the offer was accepted. Failure to do so, by not filing returns or by creating a new liability, means that the offer is undone, and the complete amount that was settled comes back into play.

If a taxpayer is going to have a hard time remaining in compliance, then another option may make more sense.

Previously filed and rejected Offers in Compromise

Many people think that filing an offer in compromise is just filling out some paperwork.  In very simple cases, it can be not much more complex than that.  But in most cases, a story has to be told; a factual story that will convince the IRS to agree to the proposed settlement.  The filer has to understand all of the rules and exceptions to the rules as well.  Failure to tell the story properly and/or failure to know the rules and their exceptions will usually end up in a rejection.

Most Offers in Compromise are rejected and the belief that filing an offer is just filling out some documents and crossing fingers… is the primary reason why.

A common example we see is the taxpayer that has been filling out a financial statement and sending it with a 656 form over and over again.  Each time the offer is rejected and the statute of limitations on collection is extended.

But also each time an Offer is filed the IRS sees that filing adds to the bad faith the IRS already sees in the taxpayer. When the newest Offer is filed the IRS won’t take it seriously.

Statute of Limitations on collection isn’t far away  

Imagine that you filed a return on April 15, 2005.  If no tolling of the statute has occurred as a result of a bankruptcy filing, a previous offer in compromise, or certain appeals/litigation, the IRS’ 10 years to collect the debt is about to run out.

Imagine as well that the $150,000.00 dollar debt that has accrued with penalty and interest would likely settle via offer in compromise for $25,000.00.

Sounds great right?

Imagine as well, that the IRS would agree to a $750.00 payment each month toward the debt or that you were already in that payment plan.

Would you file the offer in compromise?  I would advise you not to.

Why?  You have about 8 months before the statute of limitations on collection kills the debt owed to the IRS.  A payment plan at $750.00 for 8 months ends up being a lot less than $25,000.00.  The offer in compromise would extend the collection statute and if it didn’t work out, the taxpayer would be at square one, and there won’t be any 5-year look back issue mentioned above.

I should qualify for an Offer in Compromise, so why Bankruptcy?

IRS Offer in Compromise vs. Bankruptcy

Kiss for mum.This is a great question and there is really a one sentence answer to it… that goes like this.

If your debt problem is primarily the result of tax debt, and if you qualify for an offer in compromise in every way, and if you can find the money to pay the settlement amount, an Offer in Compromise is a no brainer.

Lets break that down a bit more.  One sentence is never enough for me.

First, let’s tackle the “primarily tax debt” issue.

There aren’t very many of us that have tax debt and tax debt alone.  Many people with tax problems have other debt that would benefit from a good run through the Arizona Bankruptcy machine.  It is often the case as well, that certain tax debt… especially income tax debt, can be made “dischargeable” in bankruptcy just like a credit card debt, and if it isn’t entirely dischargeable, it is often partially dischargeable with some planning.

As a result, whenever I review a case with some serious tax and other debt problems, I weigh the Offer in Compromise vs Bankruptcy.  Sometimes, we do an Offer in Compromise first and a bankruptcy later.  Sometimes, vice versa and sometimes, one and not the other. Rest assured, that wherever there is other consumer debt acting as a real burden to our client, bankruptcy is a topic of discussion, not just the Offer in Compromise.

Second, do you qualify for an Offer in Compromise in every way

Do you remember that old Clint Eastwood Movie, “Every Which Way But Loose”?  I suppose the phrase “in every way” made me think of that movie, or maybe it could have been the tremendous impact the Orangutan had on my life.

Seriously, that movie was really about nothing.  Clint Eastwood was a good fighter, wins an Orangutan in a card game? and gets jilted by a pretty woman who he chases around between fights and hi-jinx.

Why did I watch that?

Now…if you don’t qualify every which way for the Offer in Compromise, you will be thinking that it was really about nothing too.. and wondering why the CPA or EA let you do it in the first place.

That was a reach…wasn’t it?

Qualifying for an Offer in Compromise doesn’t just mean that you fill out some papers and show the IRS that you don’t have a lot of money left over at the end of the month.  There is much more to it…and it ‘s called proving to the IRS that your reasonable collection potential is less than the tax debt and that you are filing the offer in what I call “good faith”.

Determining what the Reasonable Collection Potential (RCP) is, can be confusing because there is a formula that determines it.

Even if you meet this RCP formula, the IRS can reject the offer for all sorts of reasons.  Based on your past history, it may decide that you have the ability to make more money that you are now, or it may just think you acted in bad faith in the past, and don’t deserve the settlement.

If the Offer doesn’t work out, you will have stopped the statute of limitations on collection from running, given the IRS a bunch of money you probably didn’t have, stopped certain time frames from running that are necessary to turn your income tax debt into a dischargeable debt in bankruptcy, wasted the fee you gave to someone to help you do it, and ended up right back where you started.

Which reminds me of a song…mmm..on to the last part of the question,

Finding the money

Doesn’t it always just come down to this.  You work hard and have a little of it and everyone else wants it.  Some people earn your dollar by providing a great product that you feel is worth the trade, some people just take the dollar, squander it on “do-gooder” projects that make the situation worse….

Don’t get me started.

Anyway…finding money, yes.

An Example:

“Jack” owed the government a tidy sum with interest and penalty.  He had taken a different job that paid less than he was accustomed to, and really had no way to pay it.

Perfect candidate for an Offer right?

But…the RCP made things a little rough for him.  The IRS was going to say that he had the equivalent of 1000.00 per month leftover after he paid basic living expenses.  He had few assets and so the Offer amount from a cash standpoint was going to be about 20,000.00.  He needed $4000.00 upfront and than the remainder in 5 installments when the offer was accepted.

He didn’t have the $4000.00 and he couldn’t save it easily because the budget the IRS was going to use to calculate that $1000.00 ability to pay per month amount, wasn’t his real budget.

To repeat…the “formula” budget used to calculate the Offer amount wasn’t his real budget.

The IRS’ RCP formula disallows lots of stuff.  Let’s just say that one of the things it would have disallowed as a budget item was something he couldn’t easily stop paying.

And….”Jack” had no rich Uncle.

He just couldn’t figure out how to come up with the money to pay the offer amount without causing other serious problems in his life.

So what did he do?  Instead of taking the chance he simply decided to file a bankruptcy case.

His income tax debt met the date criteria for discharge, and because the tax debt was the majority of all his tax debt, he didn’t have to take the means test to qualify to file the bankruptcy case.


If an Offer in Compromise may be in your future, make sure that it is going to work in every which way before you file it.

Michael Anderson, Tax Lawyer In ArizonaWritten By:

Anderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]

Can I Really Settle My IRS Tax Debt for Pennies on the Dollar?

IRS tax debt?   “Pennies on the dollar”.

We Can Help Settle Your IRS Debt itThere may not be a better slogan ever invented.  I mean who wouldn’t want to settle their debt for just a fraction of the amount owed.

The problem is that it may be overused.  The pitch-person on TV and Radio promises to use a soothing voice, insider knowledge and secret negotiating skills to save you from years of pain while you pay back the IRS.

If only it were always so simple.

In real life, it isn’t a simple thing to convince the IRS to settle for less than what it is owed.  It requires a tremendous amount of analysis, planning, knowledge and work and it doesn’t hurt to have a good set of facts on your side to begin with.

In order to settle the tax debt for less than what is owed you have to prove to the IRS that you don’t have the assets and/or income to pay the debt off before the IRS Statute of Limitations period on collection runs out.  If the IRS thinks that you have the money to pay the debt before that time period runs out, it won’t settle.  This is true whether I help you, you do it yourself, or you enlist the guy with the soothing voice.

The process the TV commercial is talking about is called in Offer in Compromise.  It is just an agreement between you and the IRS to settle the debt for less than what is owed.

The agreement is reached only after those income and assets are reviewed very closely to determine what the IRS calls your “reasonable collection potential”.  In order for it to review those income and asset numbers you have to supply a bunch of financial information that includes a financial statement, supporting documents and your signature given under oath that your disclosures are accurate.

As pre-conditions to the IRS’ consideration of the Offer in Compromise, you must:

1.  File all Tax Returns

2.  Make all required estimated tax payments for the current year

3.  Make all required federal tax deposits for the current quarter if you are a business owner with employees

If you have done the above and the IRS agrees that you can’t pay all the debt back before the Statute period runs out, you should be able to convince it to settle for less than what you currently owe.

Most Offers in Compromise fail however.

Historically, the success rate has been less than 25%.  Recent changes to the Offer Program have increased that acceptance rate somewhat.  In any event, it is a very good idea to have your situation at least reviewed/analyzed closely by someone  that has experience with the IRS Offer in Compromise Program.

Michael Anderson, Tax Lawyer In ArizonaWritten By:

Anderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]

I filed an Offer in Compromise on my own and it was rejected because I left out an asset…what now?

How To Proceed After Your IRS Offer In Compromise Is RejectedWhen you file an Offer in Compromise with the IRS, and you are making the claim that you don’t have the income or assets to pay the debt under the “Doubt as to Collectability” rules, the IRS will do everything it can to prove you wrong.

It will scour your income, budget and asset documents in making a case that you can pay it more than you think you can.

If you have made the mistake of leaving out an asset in your Offer in Compromise disclosures, you have made the situation worse.  The IRS Officer reviewing the file will wonder what else you have left out at a minimum, and may place your file in the “dishonest pile” making it much more difficult for you to re-file the Offer successfully even if you meet the Offer criteria.

You may be able to re-file the Offer and win nonetheless… but you probably need help.  You could have other options as well, like a low pay installment plan with the IRS coupled with the use of the Statute of Limitations on Collection or even a Bankruptcy.

The next step should be to have an experienced Arizona Tax Attorney review the situation.

Video: IRS Offer In Compromise Explained
By Tax Lawyer Michael Anderson

Michael Anderson Explains The Process of An IRS Offer In Compromise

Michael Anderson, Tax Lawyer In ArizonaWritten By:

Anderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]

My Offer in Compromise was rejected by the IRS, Should I just pay the debt in full as fast as I can?

My Offer in Compromise Was Rejected By The IRSAn IRS Offer in Compromise can be a great tool to reduce your tax debt.  However, in order to make it work, you have to convince the IRS that you don’t have enough income and assets to pay the debt off before the Statute of Limitations on collection runs out.

The fact that you may be able to pay the tax debt off quickly, leads me to believe that you may not have been a good Offer in Compromise candidate in the first place or that you didn’t plan your case right.

If I had reviewed your financial situation before you filed it I may have told you that, or I may have found a few ways to legally increase your budget or deal with asset values so that you would have made a better Offer in Compromise candidate.  I also may have suggested that you negotiate a payment plan while letting the clock continue to run out on the statute of limitations period, or discussed bankruptcy with you.

In any event, you are entitled to appeal the rejected Offer in Compromise if you do so within 30 days of the initial rejection.  Doing this will buy the time to have an experienced tax attorney look at the entire situation and help you challenge the rejection or find another more viable method for dealing with the debt that may even include…paying it in full.

Michael Anderson, Tax Lawyer In ArizonaWritten By:

Anderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]

Contemplating an IRS Offer in Compromise? 6 tips that will help your cause

bear down-thumb-375x375-63025If you have IRS tax debt, I don’t care what you say, you have been contemplating an IRS Offer in Compromise.

You are searching the internet, reading every article you can find. You have probably spoken to a few tax “resolution” companies to get a sense of fees and process.

A basic understanding about how the IRS offer program works is easy to find, so here are a few things that you may not be aware of that will increase your chances of successfully completing an Offer.

1. Make sure you are currently withholding enough tax

If you are self-employed, you must make sure that you are making your quarterly payments correctly. If you are a wage earner, you should do a “fake” tax return and make sure you are withholding enough from each paycheck to guarantee you won’t owe when you file the return next year.

If you don’t make sure you are current, the Offer will be rejected. The IRS will think that the problem will continue and that you just can’t follow the rules.

2. File all tax returns that need to be filed

If a return is missing from your history and the IRS is looking for that return, it won’t consider the offer in compromise until the return appears in its basket.

You must find out which returns are missing, which returns the IRS cares about, create them and file them.

3. Prove your Case

I know…paperwork is a real pain. The key to a successful OIC is paperwork though. So you need to “bear down” (the strange motto of the Arizona Wildcats down south) and gather proof of almost every budget item and income source you are using to make the argument.

You will need at least 3 months and sometimes more of each required item.

Get to work.

4. Honesty

Dishonesty with the IRS is dangerous for reasons other than a lost Offer in Compromise. The financial statement you are filing is being provided under oath and you are subject to perjury charges if you intentionally leave something out or place something in that is false.  If you file a bankruptcy later, the financial statement you previously provided the IRS can be reviewed and issues can arise if something was input incorrectly on purpose or not.

The other problem with over-manipulation of the data is that it something won’t make sense when the IRS looks at the big picture.

A common example of this is when the Offer filer provides a budget that is higher than her income. Either the calculation is wrong or something is rotten in Denmark. The IRS will figure out that someone isn’t disclosing income from a side job and the case blows up or worse.

I tell my clients, “the financial statement has to make sense”.

The IRS is used to seeing financial statements and its employees can smell a rotten story from a few miles away.

5. Determine whether or not the debt would be dischargeable in bankruptcy

The IRS is required to consider the fact that it may get less if it rejects the offer and you file for bankruptcy. We will often work up a complete bankruptcy case and present it to the IRS during the Offer. This shows the IRS exactly what it will get if you file.

6. Cooperate

I know that the situation is aggravating and you will be working with government employees who are part of a giant miserable machine. Most of them know it and are aware as well that you have been waiting months to get the situation resolved.

It will help your case as a result to simply…cooperate. Provide stuff. Explain stuff before it needs explaining (with the advice of counsel preferably).

If the person you are dealing with senses that you are a nice person and just want the law to provide you a way to move on with your life, it should…play in your favor.

Michael Anderson, Tax Lawyer In ArizonaWritten By:

Anderson Tax Law
2158 N. Gilbert Rd. Ste 101
Mesa, Arizona 85203

Phone: (480) 507-5985
Fax: (480) 507-5988
Email: [email protected]


IRS Offer in Compromise – Big Changes May Lead to More Tax Debt Relief

The IRS has dramatically changed the guidelines and rules that govern how an IRS offer in Compromise is
In theory…this should increase the number of taxpayers who will qualify on paper and who will ultimately be successful. Arizona Taxpayers with serious tax debt may greatly benefit as a result.

The changes were published by the IRS on May 21, 2012. (See, IRS News Release)
Additional detail can be found in the Attachment 1 to Internal Revenue Manual 5.8.5 Financial Analysis

If you investigate past articles in this blog and our website about the IRS Offer in Compromise program, you will see that we have never been terribly thrilled about it. Most people just didn’t make great candidates. These changes are a big deal though. Such a big deal that we are in the process of reviewing all of our past client files to determine whether the new rules help those that it may not have helped before.

The biggest change and the one that will probably make the most difference in the numbers of Offers filed and the success of those Offers, is the way the rules are now being used to calculate the offer amount.

The amount that is supposed to be offered to settle a tax debt has always been determined by adding the taxpayer’s asset value to his or her future available income.

Future available income was basically, gross income minus reasonable and necessary living expenses (An amount partially or some would argue primarily determined by the IRS guidelines or standards – an unfriendly set of numbers) for a predetermined number of months. Those months were 48 and 60, prior to this change.

If the future available income was agreed to at $500.00 and the taxpayer could pay the offer in a very short period of time. than $500.00 was multiplied by 48 and added to the asset value. Things added up in a hurry this way. If the asset value was $10,000.00 and the available income was $500.00, than the “cash” offer would have to be $34,000.00

Now…the multipliers are 12 and 24.

Given the same scenario, the cash offer would only be $16,000.00 instead of $34,000.00. A difference of $18000.00.

Some other very important changes to the Offer in Compromise calculation include:

1. Certain student loan payments will be allowed as part of the calculation of reasonable and necessary budget.

2. A car that is six years or older or that has 75k in miles will be allowed an additional expense for gas/upkeep of $200.00 per month.

3. The first $400.00 per vehicle of retired debt will not be added back to the monthly available income.

4. Assets which have been spent or “dissipated” three or more years prior to the submission of the offer won’t be included in the calculation of the reasonable collection potential.

5. Payments on late state taxes may be allowed to some degree as part of the budget calcuation.

Despite these grand changes and the possibility that many with serious tax debt may be able to find long term relief now outside of bankruptcy, we remain guarded for several reasons:

1. The IRS is likely going to be overwhelmed with offers that could potentially drag the process out over a few years.

2. Even more offer “mills” will magically appear and oversell the offer process to those for whom it may not make sense.

3. The IRS is not famous for following it’s own rules. Just because the manual says something, doesn’t mean it will be easy to get the IRS to do it.

4. The IRS can reject an Offer for other reasons. Just because the numbers make sense doesn’t mean the IRS Offer in Compromise will be successful.

If you have a serious tax debt though, or expect to have one, and you want to learn more about your options contact us and speak to Arizona Tax Lawyer, Michael Anderson about your situation.

Tax Resolution Companies – Are they over-promising solutions?

I met with a person recently who has a six figure IRS income tax debt.  Many of my clients do.  As is common, he had been talking to several “Tax Resolution” Companies about his options.  There are hundreds if notsuspicious thousands to choose from, so finding several isn’t hard to do.

This person is single, no children and earns a six figure income.  All of his tax returns have been filed.  These facts about him are important because without knowing anything more, they probably mean that he is NOT a good candidate for an IRS Offer In Compromise, i.e. he is not likely a good candidate to reach a settlement with the IRS for less than is owed.

A quick review of the realities that exist in regards to the offer in compromise program is in order here,  before I get to my point.

1. Standard Allowances are usually applied

The IRS will disagree with this person’s amount of living expenses.  It will review his expenses closely in order to calculate how much money he SHOULD have at the end of each month to pay toward his tax debt.  I emphasized the word should on purpose.

The IRS doesn’t have to pay much attention to what he actually spends each month.  It can rely primarily on some “standard allowances” which have been created to tell it what the “average joe”  lives on each month.  Applying these standards will leave this person with fake or phantom income.  That income will be the basis of the amount the IRS thinks he can afford to pay.  Typically they won’t allow for his payments of credit card debt, retirement investment, vacation, Christmas, birthday, eating out, etc. etc. etc.  If a single person in Maricopa county earns $6500.00 per month after tax withholding, the IRS will probably see an ability to pay a few thousand per month toward the debt.  These standards can be challenged to some degree, but it is not easy to do.

2.  The Offer in Compromise process isn’t informal

The taxpayer has to disclose his entire financial life to the IRS.  Bank accounts, work history, paystubs, proof of payment of bills, asset values etc.  This isn’t done based on a chat over the phone.  It is a formal process much like filing a lawsuit, that comes with some rights but mostly responsibilities.  Often, while the taxpayer is in the process of submitting items to the IRS, things change.  Income increases, someone dies and leaves money or property.  The chances that the offer as submitted are accepted are reduced as a result.

3.  The IRS isn’t interested in settling with most

On average, the IRS agrees to settle about 20-25% of offers in compromise that are submitted.  When I explain this to people though they still get the impression that this is random.  It isn’t.  The offers that are accepted are those that meet the formal criteria.  What constitutes a good offer varies as well.  One person may have a $100,000.00 tax debt and be able to obtain an agreement to settle for $50,000.00, but have no way to pay it.  Another with the same set of facts may have a rich uncle.  Trying to reach some sort of conclusion about the IRS’ willingness to settle these cases based on their average acceptance rate is almost meaningless as a result.

4.  Not a quick process

Most Offers in Compromise take 6-12 months from filing.  Sometimes many more months are spent on the front end getting things right and on the back end appealing a negative result.  If the offer is accepted, the taxpayer either needs to pay the amount now, or spread it out typically over two years adding to the already long time frame.

5.  Statute of Limitations on collection is extended

The offer in compromise filing stops the clock.  It extends the timeframe the IRS has to collect the debt from you.  This timeframe is called the “statute of limitations” and it lasts ten years.  If you spend 15 months trying to get the offer in compromise accepted and it doesn’t work,  you will add 15 months to the timeframe.  If there was only a relatively short period of time left on the statute of collection when the offer is filed, filing the offer may have been a big mistake.

So, the point…(finally).  

This person had decided to hire a tax resolution company he had heard on the radio before speaking to me.  The company promised to “solve” his problem and requested $10,000.00 + as a flat fee to do so.  What he didn’t understand is what I have laid out above.  He is not going to “solve” the problem with an offer in compromise.  In reality, he will solve the problem with some sort of IRS installment plan in combination with the statute of limitations period or bankruptcy.

Of course, the tax resolution company isn’t a law firm and has no ethical duty to really explain this…and didn’t. In fact, it probably uses a commissioned salesperson whose main objective is to close the “deal”.

The company is hoping that it can arrange a payment plan with the IRS, and pocket the $11,000.00 for “solving” the problem.  It is really a play on words.  “Solving” doesn’t mean reducing via an offer in compromise necessarily. The potential client doesn’t fully get this until it is too late.  He ends up paying  3 times or more than what he should, for the end result…a partial solution.

Tax resolution companies are not law firms.  They can’t practice in Bankruptcy Court, they have no duty to tell the truth, and for most taxpayers the offer in compromise just doesn’t work.  What these companies are left with are subtle sales pitches that leave the wrong impression.  A very expensive wrong impression.

If you have serious tax debt, your situation has to be fully reviewed/analyzed, bankruptcy and the statute of limitations must be considered AND a period of planning and adjusting should probably take place as well, before an offer in compromise is filed.  Don’t pay a large fee to someone on the promise of a “solution” until this work is done.