You’ve been playing ostrich, hoping that the IRS won’t notice that you owe back taxes.  Then the letters start arriving – you owe more than you thought – more bills arrive – you’re a nervous wreck – and one sleepless night you turn on the TV and see an ad for settling your tax debt for “pennies on the dollar”.  Perfect!

Or does it sound too good to be true? It may be; watch out for companies using this line to get your business.  Let’s take a realistic look at this tax debt payment option…

 What is it?

An ‘Offer in Compromise’ allows you to settle your tax debt for less than the full amount you owe.  Every tax payer would love that, right?  Correct, and that’s why this is a time-consuming, difficult option to pursue.  Note that the ‘compromise’ part of the equation is that you negotiate the settled amount.  With the IRS.  Directly.  And by the way, there is actually no legal right to have a valid tax bill reduced by the IRS; it is entirely a matter of government discretion.  So, in the end, it’s not at all a matter of how much you think you should owe, but rather how much they believe you can pay. In the words of the IRS: “We generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time.”

So who qualifies?

At its heart, this program is about creating a tax debt compromise when it is in the best interests of the taxpayer and the government.   To qualify, the burden of proof is on you – there are three things that you could show:

 Reason for doubt that the tax bill is correct. (‘Doubt as to liability’)

 The debt is not likely to be able to be collected. (‘Doubt as to collectability’), or

 There are special circumstances that would make the collection of the debt ‘create economic hardship, or be unfair and inequitable’.

Get Real.  It’s not an easy task to apply for this, although the IRS does give you workbooks and tools and calendars and calculators.  Most people fall into the second category above – if that’s where you’re headed, be prepared…

Since this is an Offer, you use definite criteria to figure out what you are offering.  The IRS states that the amount must be equal to the “realizable value” of your assets, plus the amount of money they could take from your future income.  Confused? Here’s the formula – your offer should reflect:

 ‘Net realizable equity in assets’: that means what the IRS could get from selling or seizing your stuff – your home, your car, your bank accounts and investments , etc., plus your

 Monthly disposable income minus allowable monthly expenses. (And P.S., what the IRS calls ‘allowable’ expenses may not include things like college tuition or credit card payments.)

Be prepared.  You’ll have to come up with boatloads of financial documentation, such as pay stubs, bank records, vehicle registrations, real estate information, and much much more.  It can be an exhaustive process and very time-consuming, so take a deep breath and start collecting info.  Furnishing all the data and observing the deadlines are the only way you’ll have a chance to succeed…incomplete information and errors in the filings are some of the biggest reasons for rejection of the requests.

Get out your checkbook.

And by the way, the IRS now requires all applicants to pay a non-refundable $150 filing fee.  And they require an up-front 20% non-refundable payment be submitted along with the Offer of Compromise, unless certain situations apply. Do the math so that you are prepared.

Check it out. Dealing with tax debt is one of the most difficult things that you can do.  If you decide to use the help of a tax professional, be sure to check their credentials and avoid the infomercial scams.  For more information on qualified professional help, visit: www.millertaxlaw.com.