by: Matthew Woare, EA
Have you ever fallen behind on your taxes? For most wage earners, taxes are something that they deal with sometime between January 1st and April 15th every year, they usually pay a little or get a little money back and then forget about them until the next year. For the self-employed and for business owners, taxes are a whole different beast. Saving money for estimated payments, dealing with payroll taxes, sales tax, and all of the other taxes we have a duty to pay is an everyday concern. Have you ever fallen a little short one month and not made those payments? Have you ever been too overwhelmed or confused about your requirements that you missed a deadline or didn’t pay at all? Maybe this went on for months or years before you finally received that heart stopping collection letter in the mail. If this has happened to you, you are not alone. Hundreds of thousands of taxpayers fall behind every year.
Fortunately, most tax debts aren’t that significant and are resolved by just paying the balance owed; either in full or by making payments. Other times, a debt can grow to enormous proportions either due to years of negligence or as a result of a catastrophic event with a taxpayer’s business or personal life. When a taxpayer falls so far behind that there is little hope of ever paying off the debt, it may be time to see a specialist. A tax professional that specializes in tax resolution can guide you through the process of getting a settlement accepted or developing another plan for resolving the debt.
If you have fallen behind, you may have received a letter in the mail or seen ads in the TV, radio or newspaper media from companies offering to help you settle your debt for “pennies on the dollar”. You may even have run across my company, Washington Tax Services, making similar claims. The first question most people ask when they run across these advertisements is “is this legitimate?” The answer to that question is yes, but not for everyone.
When someone refers to a “pennies on the dollar” tax settlement, they are most often talking about the Offer in Compromise program. The Offer in Compromise has been available “unofficially” with the IRS for decades as a way to cancel old tax debts off the books while still collecting what they can from the taxpayer. In the late 80’s the program was revamped, standard rules for accepting offers were developed and forms were created for submission of offers. In recent years many State tax agencies have followed suit and developed similar programs for helping taxpayers settle their debts for reasonable amounts.
The Offer in Compromise program has been a great success for the IRS and has provided significant relief for many taxpayers. We recently had a client who settled a $212,000 tax debt for $3700 through the Offer in Compromise program; we’ve also had several who have settled debts in excess of $100,000 for one or two thousand dollars.
The benefits to the taxpayer on a deal like this are obvious. But how could this possibly benefit the IRS? For starters, the IRS will only agree to a settlement from someone who in all likelihood would never be able to pay off the debt. By accepting a settlement, the IRS can close the books on cases where it would probably cost them more money to pursue collections that they would ever actually be able to collect. It also brings taxpayers back into the system. Once a settlement is accepted, the taxpayer must file and pay all taxes on time for the next 5 years or else the agreement can be voided.
What about me? You may be asking. Why should I pay my taxes at all if down the road it is possible to just settle out the debt?
Unfortunately, not everyone qualifies for a tax settlement. These programs were created to assist people who owe more taxes than they have the ability to repay. The dollar amount of an Offer in Compromise, that the IRS will accept, is different for every individual and depends on a series of complex formulas that the IRS uses to calculate what will be acceptable in terms of a settlement.
An individual with retirement savings, home equity or equity in other assets which exceeds the amount of their tax debt will not usually qualify for an Offer in Compromise Settlement. There are some types of Offers which don’t take these factors into account but they are very rarely accepted.
If you have questions about the Offer in Compromise process, please feel free to contact us.
