The economy is swimming madly back to the surface. Yet many folks, especially business owners, are still suffering. A lot of you have delinquent income tax liabilities. And if the amount owed is unmanageable, staggering, you might feel overwhelmed. Perhaps you believe that you will never be able to repay the debt. You fear liens and levies and knocks on the door.
Then one day you hear a radio commercial: Step right up! Pay pennies on the dollar to get rid of your tax liabilities! Sounds good, a miracle answer. A solution is at hand. But if you’re smart, you’re skeptical. Does the IRS really compromise with taxpayers? Will they really let you off the hook that easily? And can these firms who make this claim really help or are they scamming taxpayers out of their money?
The answer is: it depends. In the next several segments, I will educate you on this topic so that you will know whether your offer will fly before paying good money to a professional.
Five years ago, the IRS issued a warning (IR-2004-17) to taxpayers to check carefully before applying for Offers in Compromise. The IRS commissioner at the time, Mark W. Everson said, “This program serves an important purpose for a select group of taxpayers. But we are increasingly concerned about unscrupulous promoters charging excessive fees to taxpayers who have no chance of meeting the program’s requirements. We urge taxpayers to not be duped by high-priced promises.”
As of this writing, the IRS accepts only 24% of all presented offers. Here’s how to determine whether or not you meet the program’s requirements.
First of all, if you are looking to compromise payroll tax liabilities, forget about it! The payroll taxes you failed to pay are considered a “trust” fund. They are made up of the employee’s withholding taxes, which was never your money to begin with. For that reason, the IRS will not compromise. If you have a choice, always pay your payroll tax liabilities before you pay your income tax liabilities. And if you can only pay part of a payroll tax liability, add up the trust fund portion (the withholdings) and pay for those. Be sure to indicate “trust fund-employee withholdings” on the memo line of your check.
Secondly, you need to determine the reason for the compromise request. There are two categories the IRS looks at: 1) Doubt as to collectibility and 2) Doubt as to liability. The first category is obvious – you don’t have the money now nor will you have it by the time the statue of limitations runs. The second category regards innocent spouse issues (my flaky ex owes this, not me!). Or involves changes to your tax return creating a new liability that are the result of an audit or other adjustments. You disagree with the changes but the statute period to prove your case has run out. Most offers in compromise fall under the heading of doubt as to collectibility.
The IRS expects you to pursue other routes before trying for an offer in compromise. If you have room on a credit card, they expect you to use it up to pay them. They want you to tap into family members and friends for loans, or refinance the house (which is probably still swimming madly toward the surface as well). They want you to try for an installment agreement with the IRS. This involves completing IRS form 9465, Request for Installment Agreement, and form 433-A, Collection Information Statement for Wage Earner’s and Self-Employed Individuals. From the data collected here, the IRS will determine if you can comfortably make monthly payments toward your tax liability.
If they decide you cannot afford an installment agreement, they may deem you uncollectible. When that official designation comes down, you will be left alone for an entire year. No collection efforts, no garnishments, no liens, no levies; you enjoy a reprieve. Penalties and interest will continue to accrue, of course. But you won’t have to worry about Roscoe and Vinnie showing up at your door. Once the year is up, they will send you a threatening letter, designed to make you shudder and cry. But don’t be alarmed. It’s spit out from a computer and it’s just their way of getting your attention, of making you respond. Do so. Reevaluate your financial status and go for the installment agreement if you’re able, or get deemed uncollectible again or if it looks like your dire straits will continue unchecked forevermore, consider an offer in compromise.
Stay tuned. In the next segment I will discuss how to complete form 433-A. You might be surprised to find that the IRS has a different take on your finances than you do. If you’re hell bent on getting this information immediately, purchase my book Taxpertise, The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know, available at www.entrepreneurpress.com.
