Tax Resolution Academy

A friend of a friend was recently referred to me for some help with a tax problem. This individual isn’t rich, works a regular job for a paycheck, and simply got behind on personal income taxes. The situation is compounded by the possibility of some errors on the originally filed tax returns, which I have yet to examine to make that determination one way or the other.

This is NOT an uncommon situation these days. Regular, working class folks that owe a few thousand this year that they can’t pay, and the same thing the next year, etc. Do this for 3 or 4 years, and suddenly you owe the IRS $10k, $15k, $20k…with penalties and interest growing it daily. So, what to do?

First and foremost, remember this: Don’t get ripped off by a tax resolution firm promising you the world when you can easily fix the problem yourself.

Yes, the IRS carries a big stick. But they’re not going to hit you upside the head with it if you take care of the situation.

First of all, if you believe you’ve made mistakes on your tax returns that caused the liability, then you should have the tax returns amended. You have three years from the date a return was filed in order to correct it, so if you’re in that time window and you think you would owe less if they were fixed, start there.

Second, if your tax liability is under $50,000 and it’s personal income tax, then there is a special program available called a Streamline Installment Agreement that you should look at. Under this program, the IRS will let you enter up to a 6 year payment plan (or less, if you can shoulder the monthly payment), in order to pay this off. Warning: Penalties and interest still accrue while you’re on a payment plan!

If the tax debt is getting old, say older than 6 years, then another option might be to get you into a non-collectible status and just ride it out until the statute of limitations expires (which is 10 years). For this, you have to be able to demonstrate that, in a nutshell, you are flat broke and scrape by paycheck-to-paycheck. If you suddenly win the lottery, the IRS will see that and come knocking on your door again, of course.

The final option to consider, if you are broke and really just want the … Continue reading

Yesterday, the IRS rolled out a shiny, brand new version of Form 656-B, the Offer in Compromise application booklet. After years of complaints from every corner of the tax world, including tax professionals, taxpayer advocacy groups, the government’s own Taxpayer Advocate panel, and even members of Congress, the IRS has finally fixed the worst problem that has ever existed with the Offer in Compromise program.

For the past 15 years, the IRS expected you to include in your offer amount the equivalent of your next 4 or 5 years worth of disposable income. In other words, the IRS would look at your current income, deduct your allowable household expenses, and then multiply that number by either 48 or 60…and then expect you to come up with that amount of money (plus the value of your assets) within the next few months, which obviously isn’t practical and defeats the very purpose of the OIC program.

Here’s an example: If you make $4,000 per month, and the IRS “allows” you credit for $3,500 in monthly expenses, then you have $500 per month left over. If you agree to pay your Offer amount in 5 months or less, they multiply that $500 times 48 months, which is $24,000. If you also happen to have $20,000 of equity between a car and your house, your minimum offer amount suddenly becomes $44,000, or almost an entire year’s salary…and they expect you to come up with that amount in 5 months. And if you owe the IRS less than this amount, then you’re not even eligible for the program.

In other words, the Offer program was really only an option for people that owed hundreds of thousands, if not millions, of dollars, and could come up with that kind of cash to make a lump sum payment, OR was only good for people that were absolutely destitute, with absolutely no assets and so little income that they couldn’t even realistically put a roof over their head.

Well, the IRS finally wised up after years of effort by tax consultants such as myself, advocacy groups, and the Taxpayer Advocate. Under the new rules announced yesterday, the IRS has dropped the “multiply by 48 or 60” rule and made it a “multiply by 12 or 24 rule”. If you are paying your offer amount in full within 5 months, this means that your minimum offer amount you must send the IRS just … Continue reading