You can’t just call up the IRS and say “let’s make a deal.” They are the IRS. They have a process that you must go through, and you need to understand that process. Most people have heard the term Offer in Compromise, that’s the term the IRS uses to describe the process that they go through in order to determine if they are willing to settle with you for less than what you owe.
I have done several videos, articles and blogs about how that process works in detail. Suffice to say, if you have a tax lien the IRS will settle with you for less than what you owe if you can prove to them you do not have the ability to pay the tax debt in full over the remainder of the Statute of Limitations.
There is a lot of detail that goes into successfully filing and completing the Offer in Compromise process. That is why most people fail when they submit an Offer in Compromise. There are many, many traps for the inexperienced. The more you know, the better off you will be, whether you want to try it on your own, or if you are looking for someone to do it for you. The first question you should ask someone is how many times have you done this before?
The real question is how does the IRS determine your “ability to pay?” It is like a lot of legal things, it sounds simple until you get into the details, but let’s give it a shot.
The IRS starts with a simple formula. They look at the net value of your assets, plus your monthly disposable income, multiplied by 12. So if the only asset you have is a $5,000 car (with no loan on it) and every month you have $500 left over after you pay all of your bills, in theory, you can settle with the IRS for $11,000. It would be $5,000 in assets, plus $500 a month x 12 equals $6,000. In other words $5,000 + $6,000=$11,000.
Beginning June 1, 2012, the IRS made the process dramatically easier to get a settlement. Before that date, they would multiply your monthly disposable income times 48. So under the old rules, the minimum offer would be $29,000 (48 x 500=24,000 plus $5,000 for the car equals $29,000).
It sounds pretty simple, and again, it is in concept. Here are some of the details that can trip you up:
1). If all you have is an old car worth $5,000, then it is pretty easy to determine the net value of your assets. However, if you have a home with any equity in it, you have to consider that, and there are rules which determine the value of your home and the value of your equity. You also have to take into account 401Ks and pension plans and again, those depend upon your ability to get the money out, and any penalties you might have to pay.
2). One of the most common problems for a lot of taxpayers is determining allowable expenses. The IRS is going to always try and figure out what your monthly disposable income is, but often times what you think is “the money you have left over” is a lot different then what they think you have left over. There are a lot of rules about how high your expenses can be.
3). The IRS will also take into account the length of time remaining on the Statue of Limitations, so you would be wise to determine that before you submit an offer.
4). There are also rules to determine if you can discharge any or all of your taxes in bankruptcy (more on that in other blog entries and videos). In any event, the IRS is required to “consider” what they would get from a taxpayer if that taxpayer were to file bankruptcy. In other words, your ability to discharge your taxes can have a significant impact on the IRS’s negotiations with you.
5). If you are going to try this on your own, I wish you well. If you are looking for someone to do it for you, be sure the person you hire is a tax lawyer who does it every day, and be sure they are going to stay involved with your case from beginning to end.
Len Stauffenger’s office has been solving IRS problems for taxpayers for years all across the country.