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How to settle your IRS debt for pennies on the dollar

by admin 26. July 2010 11:38

Everyone has seen ads from various tax firms offering to work out tax settlements for pennies on the dollar. How can they do this? Is there a magic secret they know that we don’t?

For the vast majority of people with IRS debts, these firms CAN settle the liabilities for pennies on the dollar – about 115 pennies on the dollar. We can do that too.

These firms operate by bringing in hundreds of people with tax debts to find the very few they really can help with large settlements. These one or two cases they find are settled using an IRS process called an offer in compromise. Why do only a few out of a hundred qualify? The IRS has very strict criteria for accepting settlements using offers in compromise. These criteria are set in tax law and are not subject to IRS discretion.

There are only two situations when the IRS can accept a settlement of a tax liability for less than the total amount due. The first situation is when there is substantial doubt as to whether a tax liability actually exists. For example, if the IRS has assessed a large tax liability based on an audit, but the IRS is not really certain it would prevail in court, they may agree to a partial settlement of the liability to avoid a possible loss in court. Obviously, this is a rare situation.

The second situation where the IRS can accept less than the full tax balance due is doubt as to the collectability of the assessed taxes. This sounds great for taxpayers on the surface. However, there is a formula for determining collectability. The formula looks at the taxpayer’s assets and income over ten years into the future. If the formula determines that the balance cannot be paid in ten years, the excess over what can be paid over ten years can be forgiven.

From a taxpayer standpoint, proving that payment cannot be made within ten years is a complex process. The taxpayer has to complete a personal financial statement and provide detailed documentation of assets, liabilities, income, and expenses. In our experience, most taxpayers do not want to go through this process as it involves providing plenty of information the IRS can use to seize assets in the event an offer in compromise is not reached. Taxpayers have to provide copies of bank statements, for instance.

So what happens to someone who owes a significant amount in taxes, who cannot qualify for an offer in compromise? Typically we will assist in reaching an agreement with the IRS called an installment agreement. With an installment agreement, the IRS has some leeway to forgive penalties, but typically cannot forgive interest. By law, they are forbidden to allow a situation where someone has benefited from not paying a tax debt on time.

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