As a Matter of Tax

“I don’t even bat an eye at any tax debt less than seven figures anymore.”

“Are you serious?”

It was my first day at the tax resolution firm that gave me the jump start to my career, and my colleague – another attorney – smirked when I asked him if one of our clients really owed $50,000 to the IRS. Oh, and the client is retired.

“That’s bad.” I remarked.

“No, it’s not. In the tax world, good things are bad and bad things are good.”

An IRS Offer in Compromise – also known as a tax settlement – is an agreement between the taxpayer and the IRS to settle the taxpayer’s tax debt for less than the full balance owed. The number the IRS agrees to isn’t randomly thrown out there. It’s not as simple as the change in the taxpayer’s piggy bank or the bills in his wallet. Rather, the IRS uses a standard formula for every settlement offer that comes through.

The formula itself isn’t terribly complicated: it’s a the sum of your future income (using the IRS’ expense standards) over a fixed period of time, plus the equity in the stuff that you own. But before the IRS even considers an offer, it wants to know if the taxpayer can pay the full amount back before the debt expires. Put simply, it’s the amount the IRS reasonably expects to collect from a taxpayer who owes but who cannot pay the full amount back.

Let’s take my client above. He owed about $50,000 to the IRS (I don’t care what anyone says, that is a lot of money). He receives a minimal amount of social security income and really owns nothing that he could sell to pay towards the debt. No doubt, he’s in an unenviable financial situation.

A tax attorney would be over the moon for a case like this. And I’ve got to say, only attorneys – the notoriously emotionless beings that they are – would tell this client that he’s in a good situation.

Based on our analysis, we concluded the client couldn’t pay the debt back in full. So what comes next? We calculated the amount the IRS reasonably expected to collect from him before the debt expires. That dollar amount ended up being a number substantially less than the $50,000 he owed. We handled the paperwork, submitted the Offer, and negotiated the acceptance directly with the IRS. Once all the paperwork was finalized, he sent in a check and he was done with us.

Helping this client was admittedly on the easier side. Many Offers are far more complicated, can involve some strategic planning, and may require an appeal if we believe the IRS got it wrong. While the difficulty level varies, the Offer process is generally the same every time:

1. Determine whether you can pay the tax debt in full.
2. If you can’t pay it in full, determine the dollar amount the IRS expects you to pay.
3. Paperwork! Draft the Offer documents and provide proof of the income, expense, and asset information you list.
4. File the Offer with the application fee and your initial Offer payment.
5. Discuss the numbers with the IRS employee responsible for reviewing your Offer.
6. If accepted, pay off the remaining balance of your Offer.

Want I want you to know is that it’s possible. That being said, executing the above is certainly made easier with the assistance of a tax professional. If you owe the IRS and are struggling to pay it back, consider reaching out for help.