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IRS Frequently Asked Questions

faq (8)

How do I “qualify” for an Offer in Compromise?

Here is a real life example of a client I represented who had an Offer in Compromise accepted (the names have been changed).  Joe the Plumber owes the IRS $82,000.  He wants to do an Offer in Compromise.  We first have to determine if he “qualifies” using the IRS mathematical formula which is:  net assets + [disposable income x 48] = minimum offer.

Here is Joe’s financial picture:

            Assets                                                                         Income / Expenses

$ 2,000 in First National Bank                                 $ 3,200 monthly income

$ 4,000 fair market value of car (no lien)              -$ 3,050 monthly expenses

$ 6,000 (Total Assets)                                             $    150 disposable income

Here is how to calculate Joe’s minimum Offer:

Total Assets = $6,000

                         +$7,200          ($150 x 48)

                          $13,200

Joe “qualified” at $13,200.  In fact, he has to offer at least that much.  Remember, the IRS doesn’t have to accept that offer.  Joe knows that he qualifies in fact he did more than qualify.  He eventually submitted an Offer in Compromise for slightly more than the minimum, the IRS eventually came back and negotiated a settlement for more than his Offer but greatly less than the amount he owed.

What do I do if the IRS knocks on my door?

It sounds scary but it’s really not – if you have a good tax attorney.  If an IRS agent is stopping by your house or your business, it’s because you’ve had a tax problem for a while and you’ve been ignoring it.  It’s likely you have received some IRS documents from their ACS system (Automated Collection System).  If you don’t respond to those documents, or if they’re not satisfied with your response, they will eventually come looking for you.

The IRS agents who come knocking on your door aren’t bad people, but they can seem intimidating because they’re the “government” and you’re not sure what they’re allowed to do and what your rights are.

So here’s the straight scoop.  The agent who shows up on your door is on a fact finding mission.  He probably has a limited accounting background and he has no legal right to enter your house or to take any of your documents.  These agents are not officers of the court, they are not similar to or equal to police, and they cannot arrest you or “serve you” with papers.  The IRS badge is really just to identify them.  It doesn’t give them any special powers to interrogate you.  You don’t legally have to answer any of their questions.  They know they instill fear because they know that you don’t know what they’re allowed to do.  I had a client tell me that he had an IRS agent showed up at his office when he wasn’t there, walked behind the reception desk and then began to look over the shoulder of each and every employee to see what they were working on and to see what was on their computers.  This particular agent then interrogated each of those employees.  He got away with it because he flashed his IRS badge and the employees just assumed he could do whatever he wanted – wrong!  They didn’t know any better.  The best advice I can give you is, (1) be polite, (2) don’t answer their questions, and (3) tell them the old “talk to my attorney”.  To be clear, you can legally just shut the door.  Of course that doesn’t solve the tax problem.  If you don’t already have a tax attorney, go get one immediately.  I recommend being polite, because eventually you’re tax attorney will have to deal with this revenue officer.  Make no mistake they are there to gather information that they will use against you.

One more note – if an IRS agent shows up at your place of employment, they can only question you in public areas; they cannot pursue you into “employee only” areas.  Remember, the best position is to simply not answer their questions.

One exception, this one is rare and hopefully it will never happen to you, but the IRS does have individuals called special agents or criminal investigators.  If one of these folks shows up, you’re dealing with a different animal.  They have badges, carry guns and are sworn court officials.  They show up when you have really bad tax problems.  If they show up with the correct Court Order, they can enter your house and confiscate your documents and force you to come in for questioning.  The good news is most US tax payers never meet up with them.

I owe the IRS a bunch of money – HELP!

Everyone knows the IRS code is ridiculously complex.  There are an amazing number of statutes, laws, and codes and many of them can provide relief to tax payers.  The best thing you can do is have a competent tax attorney and use his or her experience to evaluate and plan carefully how to help you.  Let’s look at some of the most common ways to reduce your tax debt.

1.         Almost everyone that comes to me at one point in the interview talks about those commercials they’ve heard where they can settle for “pennies on the dollar”.  Everyone with a tax bill dreams of getting an Offer and Compromise to settle it.  This is a very real solution.  The effects can be substantial.  Many taxpayers (many of my clients included) have paid off their tax debt for a fraction of the actual debt.  (I have posted videos on my website of real people I represented that have done just that).  However, this is not as easy to do as the commercials would lead you to believe.  It takes careful planning.  It needs to be done right.

2.         In this economy many folks are living in a world where they are struggling to keep their lights on.  There are situations where even the IRS is willing to recognize that you can’t make even a small payment to them, this condition is known as “currently not collectible” or sometimes referred to as “hardship”.  The advantage to you is that the IRS literally walks away from you for a while.  They’re putting you on the shelf and hoping that one day your finances turn around, and then they can come back for you.  When you’re in hardship status your debt continues to grow but you aren’t pressured by the IRS so it can be a temporary solution.

3.         There are laws that allow an “innocent spouse” to reduce or even entirely eliminate a tax bill that was incorrectly levied on a husband or wife who filed a joint return.  This usually comes up where there’s been a separation or a divorce.  For example, maybe your husband did some things in his business that he shouldn’t have done that created a big tax bill and you knew nothing about it.  But, because you signed the joint tax return you are technically responsible for the bill also.  If you meet certain requirements you may be able to get the IRS to eliminate your tax debt entirely.

4.         You can make lump sum payments to the IRS; you can even make monthly payments to the IRS.  In IRS lingo these are installment agreements.  If you owe less than $25,000 you won’t need to provide financial information to the IRS.  These agreements can be short or long.  When you chose a payment plan you will be paying interest as you go and your best course of action is to pay it down as quickly as possible.

5.         Another tax defense (it’s not common but it is, in fact, used) is for the taxpayer to make use of the statute of limitations.  The IRS basically has 10 years on its tax claims.  It sounds simple (hey how hard can it be, it’s 10 years), it’s not one you should try to figure out on your own.  It’s actually complicated because there are questions about when the 10 year statute begins to run and there are factors that can extend the 10 years.  In other words, there’s no guarantee that the taxes you owed from 1999 expires in 2009.  If you can prove the IRS claims have gone beyond the time limit, you are relieved from those tax liabilities.

6.         Another tax defense (typically not that popular) is filing for bankruptcy.  I have been helping taxpayers for years and I’m surprised how many taxpayers are completely surprised that bankruptcy is a possible solution.  It doesn’t work for everyone but depending upon your situation you may be able to discharge your taxes in bankruptcy.  As with many other things with the IRS, “it’s complicated”.  A competent tax attorney can figure it out for you.

I would like to see another example of how an Offer in Compromise is computed.

Susie Q owes $64,000 to Uncle Sam.  She has no assets, but her disposable income (average monthly income – allowable IRS expenses) is $297 a month.  She qualifies for an Offer in Compromise of $14,256.  We calculate that by multiplying the $297 a month disposable income x 48 which equals $14,256.  Again, the IRS doesn’t have to accept this amount.  It’s just a guide, other factors come into play.

Are there other factors in determining if my Offer will be accepted other than just the mathematical formula?

Absolutely.  How old are you?  Do you have any health issues.  What is your level of education?  What is your work experience?  The math in determining a qualifying Offer is just a starting point.  Remember, that just gets you in the door and we want your Offer to be accepted.  If you have any health issues, be sure the IRS knows that.  When I submit an Offer for someone, if they have health issues we support the Offer with documentation to prove their medical conditions.  Remember, a real person at the IRS is going to be evaluating your Offer and all of your supporting documentation, looking at your ability to pay now and in the future.  Here are just a few samples of the types of things that I have submitted to help a client obtain a successful Offer in Compromise:

1.         A diagnosis from a treating physician of Bipolar disorder;

2.         X-ray reports (not the actual x-rays the “report”) proving herniated discs in the back of a construction worker;

3.         Medical reports proving a lady has rheumatoid arthritis throughout her body;

4.         Extraordinary legal bills from an unrelated lawsuit;

5.         Letters from doctors indicating his patient (my client) will need future surgery;

6.         Medical reports showing a diagnosis of depression;

7.         Affidavits regarding educational background and work experience; and

8.         Documentation evidencing an economic calamity.

The list can go on forever.  The point is you have to give the IRS examiner a complete picture of why you are unable to pay the full tax bill.

Why can’t I handle this myself with the IRS?

You can.  But there’s a good chance you will be hurting yourself and here’s why.  I’ve dealt with lots and lots of IRS agents over the years and for the most part they’re good people who are just doing their job.  The problem is, their job is to (1) collect money; and (2) close files.  That’s how they’re trained and that’s how they get judged by their superiors.  “Getting money” means putting you on a payment plan and “closing files” means just that.  They can close the file and they can tell their manager, it’s over and then they get a new taxpayer to go after (there’s always someone waiting in line).  They can close the file if they can get you on a payment plan or, if your finances are really bad, they can put you in “hardship” status.

The problem is, most of the time these are not good options for you.  Under either scenario, a payment plan or hardship status, the penalties and interest continue to build your debt, at an alarming rate.

It’s not their fault.  It’s literally not their job to explain to you how an Offer in Compromise works or whether you qualify for one, or to tell you when the statute of limitations is going to expire or any number of other things that might help you.  Even if they wanted to, they don’t have much experience in things like Offers in Compromise because those are all handled by a centralized office in New York.  Local IRS agents don’t make the decision on whether your Offer is accepted or rejected; and they almost never work on offers.

Many of the IRS agents I have talked to have never worked on an Offer in Compromise.  And, again, even if they wanted to, they don’t have the time because to do an Offer properly it takes not only extensive knowledge of the process but also a lot of time.  They don’t have time for that, remember, they have to close files.  Bottom line, they don’t get paid to sift through all the options and analyze them for you.

Why can’t I find a local tax attorney who works with the IRS every day?

There are a lot of people in this country with IRS tax liens but they are spread out all over the country.  So let’s say, for example that you live in Fort Wayne, Indiana.  If you were going through a divorce, there are enough other people in Fort Wayne going through divorces to keep the divorce lawyers busy.  Most likely there aren’t enough people in Fort Wayne with IRS tax liens to keep a Fort Wayne tax attorney busy.

And truthfully, most people who call themselves tax attorneys or CPA’s are working in a different area of tax law.  They’re working to reduce or eliminate their clients’ taxes BEFORE the tax bill comes due.  They work hard to make sure they take advantage of all the tax deductions and credits available.  There are lots of tax attorneys and CPAs who do this kind of work because everyone (and every business) that files a tax return is a potential client.

In the IRS world of tax liens and tax levies “local” isn’t important.   What’s important is finding someone who is in front of the IRS every day.  So, if you’re going through a divorce you need a local attorney who is familiar with policies and practices of your local divorce court.  You want an attorney who is in that court all the time.  In fact, the same applies if you’re in your local courthouse for anything.  But the IRS is not a “local” practice.  If you want to get your tax lien removed or your bank levy lifted its done the same way whether you live in Fort Wayne Indiana or in Columbus, Ohio or any other city in the country.  Geography is irrelevant.  We have lifted bank levies and wage garnishments for people in Michigan, Ohio, Indiana, Kentucky, etc.  We use the same process each time regardless of where they live.

How does the IRS determine who to “go after”?

We could talk about this one all day because there are lots of exceptions to the rules.  But, in general, once you get hit with a tax lien, you get dumped into the Automated Collection System or, in IRS lingo, ACS.  It’s the big computer in the sky that just continually spits out liens and levies and notices, etc., to thousands of people across the country on a continuing and regular basis.  Yes, if you are in ACS your bank account can be levied and your wages can be garnished.  There is no exact set time period for how long you will remain in ACS.  As long as the IRS is “satisfied” with the progress on your case, you will stay in ACS.

When the IRS is no longer satisfied with the progress on your case then you will be turned over to a local field agent (the one nearest you).

Technically, your file goes to the local field office and before the IRS agent (also known as a revenue officer) gets to you, you will be placed into a queue (essentially a waiting line – take a number).  For example, if you live in the Indianapolis area, the IRS offices nearest you will get your file.  Each revenue officer in the country has a capacity or a case load that he or she can handle.  Each time they close a case they are then assigned a new case from the queue.  How quickly you move up the line, so that you are eventually handed over to a specific revenue officer, depends on how fast the agents in that office are closing files.  But, that’s not the only guideline.  The IRS uses complicated computer programs to determine if certain people or businesses should jump to the head of the line.  Exactly how those programs work… I’m not sure anyone knows.  However, it’s somewhat based on risk to the government.  In other words, the people that they are concerned will accrue tax debt more quickly than others tend to move up faster.

As always, with IRS tax debt you really can’t be sure when the IRS will come knocking.  You are simply at risk until you take the first step and decide to solve your problem.  Once you hire someone who works with the IRS everyday you reduce your odds of being hit with a nasty surprise.  A tax professional can submit a Power of Attorney on your behalf so the IRS knows you are working with a professional.  He or she can then discuss with the IRS how you wish to proceed to solve your problem.  Then, it’s in the IRS’s best interest (and yours) to work together to resolve you tax lien.