6 Min Read
NEW YORK (Reuters) - People trying to reduce their old tax debts should not expect the "pennies on the dollar" deals promised in television advertisements of now-bankrupt tax-debt negotiation firms, but U.S. state and federal tax agencies are willing to talk.
The U.S. Internal Revenue Service is facing a growing backlog of requests for the "offer in compromise" tax-relief procedure for delinquent taxpayers, according to a Treasury Department report released last month.
At the same time, tax attorneys say more Americans are trying to find solutions of all types to their tax debts at both the federal and state levels.
In fiscal year 2011, the IRS received 59,411 new offer in compromise requests, a 28 percent increase over four years earlier, according to the report by the Treasury Inspector General for Tax Administration.
This influx of new cases caused both by the ailing economy and a simplification of the offer in compromise program comes as the IRS has cut resources to manage those requests. The backlog increased 57 percent to 36,069 in 2011 from 23,003 in 2007.
"With the economy, what has picked up in our caseload is collection matters," says tax attorney Steve Katz of Sideman & Bancroft in San Francisco.
"Someone might have gone from a place where they had high earnings to a place where they don't," says Katz, who specializes in tax controversies such as such collections. "You need to persuade the IRS that their situation has really changed and that they are not hiding the money elsewhere."
Katz says he has been filing more offers in compromise recently. He is also having more discussions with both the IRS and California tax officials about clients who cannot pay or who need an installment agreement in order to do so.
Since the economic downturn began, changes to the offers in compromise program are allowing more taxpayers to qualify for streamlined approvals. It has also become easier for people to reach agreements to pay their tax debts over time.
"The IRS has relaxed its policy with offers since the Great Recession hit," says tax attorney and former IRS agent Gerard Levins of Hopkinton, Massachusetts, who figures he files between 60 and 75 offers a year. "The IRS is really bending backward to get people back into the system."
If you are in the unhappy situation of simply not having the money to pay back federal income taxes that you owe, you have three courses of action:
(1) You can get an installment agreement, in which you will pay the full tax liability, but over an agreed-upon period of time.
(2) You can file for an offer in compromise, in which you pay less than the full amount you owe, based on a negotiated agreement with the IRS.
(3) If you are really in a hardship place where your income is less than your expenses, you can get the taxman to back off for a year or two by getting your liability declared currently noncollectible.
What you choose to do depends on your financial situation, how much you owe, and how much time remains on the statute of limitations for your tax liability. Generally, the IRS has 10 years from the date of the assessment to collect the tax.
Applying for an offer in compromise is a complex process that requires you to figure out your budget based on IRS rules for how much you should be spending on particular items in your area of the country.
To do this, file Form 656 -- which comes with a large accompanying booklet -- or delegate the headaches and find a tax attorney who specializes in this area.
How long it all takes depends on whether you are filing a streamlined offer, which requires less information but is limited to people with household income of $100,000 and who owe less than $50,000. More than two-thirds of such offers are processed in less than six months, but nonstreamlined offers can drag on far longer.
High-profile advertising campaigns for Taxmasters, "tax lady" Roni Deutsch and J.K. Harris made it sound like you could settle your tax debts for pennies on the dollar.
That is rarely the case -- and all three advertisers have gone bankrupt in the past year.
First you have to qualify for an offer, and then you have to negotiate how much you will pay, based on your income and allowed expenses.
"The less money you make, and the less assets you have, the more likely you are to get an offer through," says tax attorney Jason Silver of Scottsdale, Arizona. "If you have equity in a house, or a retirement account, then it's harder.
" ... A lot of people are still doing pretty poorly, so if you're going to do an offer, now is the time to do it," says Silver, who figures he files a few dozen of these a year.
If your debts are old, you may just want to try to wait the IRS out. Various things, including filing an offer in compromise, can stop the clock on the statute of limitations.
If you can afford to pay your tax debt over time, you are more likely to find some relief with an installment plan than a compromise offer.
While the IRS can reject an installment agreement, it usually will not unless you owe an astronomical sum or request an overly lengthy payment period. In fact, acceptance is guaranteed if you owe less than $10,000, have paid all your taxes for the last five years, request a payment period of three years or less, and the IRS determines you cannot pay the tax owed in full when it is due.
Under an installment agreement, you will still owe a penalty on those unpaid taxes, but it will be 0.25 percent a month instead of the standard 0.5 percent for people who file their tax returns and do not pay.
Whatever you do, do not ignore your tax debt. The IRS's collection efforts can include seizing your property or garnishing your wages.
That is going to be a lot more painful than figuring out how to deal with your tax debt yourself. No matter how many forms you have to file.
(The writer is a Reuters columnist. The opinions expressed are her own.)
Editing by Linda Stern and Lisa Von Ahn