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| The Basics | Cutting a deal with the IRS has gotten tougher
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The Offer in Compromise program is supposed to help settle unpaid tax bills. Not only is the IRS rejecting more claims, it's charging $150 just to apply. Some deal.
By Jeff Schnepper
A few years ago, the Internal Revenue Service announced it would be the new, customer-friendly IRS.
Needless to say, the policy didnt last long. Customer friendly? I know some collection agents from the mob with better interpersonal skills.
What really riled me up about the IRS is its policy of requiring a pay-to-play fee of $150 just to submit an Offer in Compromise.
An Offer in Compromise is a petition to the IRS for tax relief. Its an application to pay your tax debt for less than full value -- for mere pennies on the dollar, at least as some advocates advertise it.
Dont believe everything you hear, though. In February 2004, the IRS issued an alert to consumers to beware of promoters' claims that tax debts can be settled for those pennies on the dollar. Many of these companies charge a fee regardless of whether you qualify.
Ironically, the IRS now charges a fee, too, whether you qualify for relief or not.
Make an offer, stop the IRS
You file the offer on IRS Form 656. (You can get it and other forms from the IRS Web site.) The IRS will also want you to file a statement of your financial information. Use Form 433-A if you earn a wage or are self-employed. Businesses should use Form 433-B.)
Your offer must explain why youre entitled to relief. The three ways to claim relief are:Doubt as to liability. This is a genuine dispute under the law as to the existence or amount of the correct liability. If this is the basis for your offer, then no financial information is required.
Doubt as to collectibility. Your reasonable collection potential, based on your income and assets and reasonable living expenses, isnt sufficient to pay your liability in full.
Economic hardship and promotion of effective tax administration. You can also plead that by making you pay your full liability, the IRS would cause economic hardship and undermine compliance with the tax laws. If that doesnt work, try this: Because of compelling public policy or equity considerations, collecting the full tax liability would undermine public confidence that the tax laws were being administered fairly. Filing an Offer in Compromise stops the IRS in its tracks and, at least for a while, gets it off your back. The IRS cant place a levy on your property until 30 days after the offer is rejected, or until after an appeal of a rejected offer runs its course.
An offer the IRS can refuse
For the fiscal year that ended Sept. 30, 2003, the IRS received 127,769 new offers, up from 124,033 the prior year. It accepted 21,570 offers, down about 25% from 29,140 the prior year. Of those it processed, the IRS rejected 27,336 offers, substantially more than the 16,952 rejected the year before. The others were not processable because additional information was required or the offer was withdrawn.
For fiscal 2004, 106,025 offers were received with 19,546 accepted. Those accepted paid off $1,797 billion in liability for $275.3 million averaging 15 cents on the dollar.
If your offer is rejected, youre pretty much out of luck. You can appeal. But, bottom line, the decision to accept or reject a compromise offer is discretionary and cant be compelled. The decision to accept or reject an offer, as well as the terms and conditions, is left to the discretion of the IRS.
Recently, I had an offer for a 73-year-old client rejected. He had prostate cancer, was receiving intensive radiation, suffered from diabetes and had an aortic valve replacement and bilateral hip replacements. He offered the full value of his 401(k) plus an amount that he was planning to borrow. He had no other assets and was not then working. He was living with his kids.
The formal reason he was rejected was that he had not provided financial information about his children, who didnt owe anything. The real reason, I found out in conversations with an IRS agent, was that they simply didnt believe him.
He still owes the IRS the money. Hell probably still owe the money when he dies. So much for effective administration of the tax law and economic hardship as a basis for acceptance.
According to the American Institute of Certified Public Accountants, the IRS looks for reasons to reject these offers and is no longer committed to the Offer in Compromise program. Processing delays are rampant. Only 56% of offers are disposed of within six months. An additional 28% take up to a year. The rest, 16%, take more than a year, and sometimes can take as much as two years from the date of the original submission. That means that youll be burdened by repeated requests for updated financial information while your offer is being processed.
But, lets be fair. For fiscal 2004, over 90% of the cases resolved in the centralized sites were closed within 6 months of receipt. Field investigators handle more complex cases and their investigations take longer.
Now, even making an offer costs you
Starting in November 2003, the IRS gave a new definition to the word chutzpah by imposing a $150 user fee for Offers in Compromise. If the check is not included with the application, its returned to the sender. The agency wont even look at it. The reason for the fee is to cover some of the costs involved in processing the applications. And the IRS is frankly hoping to reduce the filings to only those that are serious.
You havent enough money to pay your tax. So, the IRS will charge you $150 just to consider reducing your burden. But, they dont really have to consider it if they dont want to. Am I missing something here?
Some people are exempt from the fee. If your offer is based solely on doubt as to liability, you dont have to pay.
Youre also exempt if your monthly income falls at or below poverty levels as established by the U.S. Department of Health and Human Services. Currently, for a single person, thats less than $833 per month. For a family of five, it jumps to $1,917 per month. That means that if Im married with three kids and earn $23,005, Im wealthy enough to pay the fee.
If your offer is accepted, theyll either refund your fee or apply it to the Offer in Compromise amount. But, before you can play, youll have to pay.
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