By A.J. Gross, C.P.A., E.A.
Can I really negotiate with the IRS? Does getting pennies on a dollar happen? There is no way the government would reduce my tax bill. It is the government. The government does whatever they want.
Negotiating your taxes does happen. It’s called an offer in compromise. An offer in compromise is a formal agreement between you and the IRS to settle your taxes for less. We have assisted many clients with offer in compromise arrangements. For one of our clients, the IRS agreed to accept $750 to settle $70,000+ of IRS taxes. Another client paid $2,200 to settle $50,000+ in IRS taxes. We have many more examples.
There is a catch. Not everyone qualifies for an offer in compromise. You either qualify or do not qualify. You are unable to call the IRS and start negotiating. Telling the IRS your heartfelt life story will not hold any weight. The offer in compromise program is based on rules and financial numbers. If you do not follow the IRS rules or your financial numbers do not support an offer in compromise, you will not get an offer in compromise.
There are two basic financial components of an offer in compromise: Equity in Assets and Collectability. Equity in Assets would be your home, car, investments, land, or any other assets. The IRS will request information on all the assets you own. You will also provide the IRS with documentation on any debt attached to your assets. You may qualify for an offer in compromise if you have little to no equity in your assets. For example, your home is worth less than the mortgage.
The second component is Collectability. The IRS will request proof of income and living expenses. The expenses would include mortgage, taxes, utilities, auto loan, auto insurance, gas, telephone bills, medical bills, etc. The IRS will add all you income and subtract allowable living expenses. If your monthly income is about the same or lower than your monthly expenses, then you may qualify for an Offer in Compromise.
We recommend talking to a tax professional before filing an offer in compromise on your own. Getting an offer in compromise can be tricky and time consuming. You can easily disqualify for an offer in compromise by not filing the paperwork properly. It takes the IRS about 6 months to review and accept an offer in compromise.
IRS Circular 230 Disclosure: To the extent this writing contains advice on a federal tax issue, the advice is not intended to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed in this communication.
A.J. Gross, C.P.A., E.A. is President of ALG Tax Solutions. A.J. Gross can be contacted at AJGross@algtaxsolutions.com.
This column was printed in the June 29 - July 14, 2014 edition.