Internal Revenue Service Collections Offers In Compromise

I frequently receive questions about those advertisements we’ve all heard regarding the IRS’s willingness to settle tax disputes for “pennies on the dollar.” The most common inquiry is whether the advertisements are true. While there is nothing untrue about the advertisements, there is a lot more to the process than what the advertisers can provide in a 30 second commercial.

The typical situation involves taxpayers who owe taxes, interest and penalties to the IRS and are concerned that the IRS will begin levying bank accounts, garnishing wages and seizing property. The IRS is required by law to send multiple notices to taxpayers before commencing collection activities, the last notice of which is entitled Final Notice, Notice of Intent to Levy or Final Notice, Notice of Intent to Lien (the “Final Notice”). If the IRS does not receive a response to the Final Notice within 30 days, it will levy bank accounts, garnish wages and seize accounts receivables and other property. This results not only in financial upheaval to the taxpayer, but also embarrassment to the taxpayer whose bank, employer or customers now know of their financial problems.

These problems can be avoided by responding to the Final Notice before the end of the 30 day period. I strongly suggest that taxpayers obtain professional representation for this purpose, someone who is familiar with IRS procedures regarding collection matters.

In responding to the Final Notice, a taxpayer should request a Collection Due Process Hearing. The taxpayer should propose a collection alternative; the two most common of which are offers in compromise or installment agreements. With an installment agreement, a taxpayer is simply agreeing to pay off his or her tax liability in full over a period of time, in equal monthly installments, usually within 3 years. An offer in compromise is where a taxpayer asks the IRS to accept payment which is less than the full amount of the tax liability; i.e. pennies on the dollar.

One might think this is a “no brainer;” and simply ask the IRS to compromise a large tax liability with a nominal offer. The IRS procedures are set up to avoid such result. The minimum offer amount is based on the taxpayer’s net worth and monthly income and expenses. Net worth is generally the value of the taxpayer’s property less any secured interests on the property [for example, mortgages or liens]. Monthly income minus expenses is based on the taxpayer’s actual income and the taxpayer’s living expenses which the IRS deems reasonable. The IRS uses standard figures which are based on the amount of members in the taxpayer’s family, the household income and the geographical location of the taxpayer to determine how much the taxpayer is allowed to spend on food, clothing, housing, utilities, auto and other transportation.

Without prior experience in IRS collection matters, it is fairly complicated to determine what the IRS will accept as a minimum offer in compromise. The taxpayer must complete a 6 page collection information statement. The IRS will allow discounts and exemptions for certain properties. I believe it is critical that a taxpayer retain competent representation to assist with the preparation of the collection information statement and advise the taxpayer whether he or she will qualify for an offer in compromise based on the taxpayer’s net worth and current earnings. Other factors such as a taxpayer’s age and health also could play a role in determining the acceptance of an offer in compromise.

If the taxpayer cannot reach an agreement with the initial examiner, there is also an appeals process which I have found to be very beneficial to taxpayers.

In a nutshell, a taxpayer might be able to compromise their tax liabilities for pennies on the dollar, but this largely depends on the taxpayer’s current financial status. There is no magic wand in which a representative can simply negotiate a “pennies on the dollar” settlement. It is a long and arduous process which takes sophisticated knowledge of IRS procedures and tax law.

If you have any specific questions regarding IRS collection matters, please do not hesitate to contact me at eweiss@fwslaw.com or (248) 855-6500. As a tax attorney with more than 20 years experience in representing taxpayers in IRS collection matters, I can lay out the taxpayer’s options very quickly and assist them in all phases of resolving their tax problems.