A few weeks ago I wrote about the IRS’s new Fresh Start program to help those with large tax liabilities compromise their debts for pennies on the dollar. The news generated quite a bit of excitement among taxpayers with long overdue balances. Last week I received several phone calls from interested parties who sadly did not qualify. In fact, one had already thrown away $3,500 on an unscrupulous professional who ended up not being able to help. Another was being pressured to give up a credit card number to pay a similar sum to a professional who promised a discount of up to 70% without first inquiring about her finances. These kinds of promises cannot be made without a financial evaluation--whether you qualify for help is determined by a very strict formula.
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Even though the IRS has lightened up its requirements, the process isn’t your typical negotiations process. Clients call all the time asking, “I owe $50,000. You think they’ll take 20,000?” Yeah, right, and maybe they’ll throw in a CD player. It doesn’t work like that. Here are tips to help you determine if you have a shot at negotiating a lesser amount of what you owe in back taxes.
Here’s the formula the IRS uses to determine what is owed: the value of assets (less the liabilities that secure them) plus your disposable income after allowable expenses multiplied times 12 (if the payoff is immediate) or times 24 (if you must make installment payments).
That seems complicated, but here’s what it looks like on a basic level: If you are renting, you own a beater car, and have nothing in the bank, then your asset list might total practically nothing, maybe a grand – the quick sale value of the car. To figure up your disposable income, add up all your monthly income and subtract the allowed monthly expenses: food, housing and utilities, medical, child support payments, health insurance premiums, and vehicle expenses. The remainder is multiplied by either 12 or 24 then added to the value of your assets. The final number is the amount the IRS will accept.
Here are some other guidelines to note:
First of all, if you have funds in a retirement plan, the IRS will expect you to cash it out and make those funds part of your offer. So if you owe the IRS $50,000 and have $50,000 in a retirement plan, the IRS will not settle for less.
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The IRS judges the equity in assets as a part of the equation to determine how much it will accept. It used to be that if you owned a home, you could forget about making a deal because most taxpayers could pull out sufficient equity to satisfy their tax obligations. And that’s what the IRS would expect. But it’s rare for people to have equity in this housing market. Owning a home will not deter your efforts if the mortgage is greater than the value of the home.
The IRS will not inventory your inexpensive household furnishings or your clothing and treat them as assets. But if you have collectibles or art work or other valuables that can be sold to satisfy the debt, the IRS will expect you to sell them. If an asset is secured by a loan, the IRS will respect that and will only want the difference between the loan balance and the quick sale value of the asset.
The IRS wants you to keep your car so you can continue going to work and generating tax revenues. If you have a loan on the car, the value of the car is likely the same or even less than the loan balance. So again, they will respect the lender’s first position. If there is no lender, the IRS will deeply discount the value of the car when using the figures in the equation for determining an acceptable offer.
The IRS will not stand in line behind unsecured creditors like credit card companies. Your monthly payments to these creditors will not be acknowledged when determining your disposable income.
Check out the national standards for vehicle operating costs, housing and utilities, and household expenses on the IRS website. If the national standard for housing and utilities, for example, for the area of the country in which you live is $1,400 per month and you actually pay $2,300 per month, too bad. The IRS will expect you to move to cheaper digs. It will reduce that expense to match the national standard when calculating your offer, unless you can show a very good reason for staying. A good reason would be that you are disabled and this home has the disabled access features you require.
And lastly, the IRS will look at factors such as your age, your earning potential, your health, your marital status, the health of your dependents, and how much longer the statute of limitations is going to run on your tax liability.
If you don’t qualify for an offer, you may still have a chance to be deemed uncollectible which will give you a year off to regroup. Call the IRS for more information or seek the advice of a competent tax professional.
Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is the owner of Taxpertise in Sonoma, CA and the author of Entrepreneur Press book, “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn't Want You to Know.” Follow Bonnie Lee on Twitter at BLTaxpertise and at Facebook.