August, 2008 Tax Newsletter

Resolving Your Tax Debt With the IRS

As a major focus of my tax practice is resolving tax debts, I receive many phone calls form people requesting help on getting rid of or mitigating these nagging problems.  These people are being intimidated and threatened by the IRS and/or state tax agencies, and their general health and wellbeing, relationships, and financial condition are under severe duress.

There are many reasons taxpayers can owe money to the IRS.   They may have difficulty paying taxes when due, receive bills for erroneously assessed taxes, or owe interest and penalties on amounts paid late, among other reasons.  This coupled with the fact that there is an enormous tax gap (around $340 billion at my last report), has placed the IRS in attack mode.  The IRS has been under great pressure from Congress to reduce the gap and expedite collection of tax delinquencies and has helped their efforts through legislation.  Basically, the tax gap is the result of non-filers and filers who understate their income or overstate their deductions.   The bottom line is that it is getting tougher to work with the IRS to reduce tax debts.  

Despite the foregoing it is still indeed possible to compromise tax debts or arrange for more convenient installment agreements for financially strapped taxpayers.  People contact me all the time telling me they would like to submit an offer in compromise, which means compromising a tax debt including interest and penalties at a fraction of the amount owed.  The IRS always has and still does consider the acceptance of an offer to be a last resort.  It will do so only if it believes that it cannot collect more through other means.  The IRS in 2007 accepted 26% of the offers submitted, up from 19% in 2004.  However, the number of offers submitted dropped from 106,000 in 2004 to only 46,000 in 2007.  The trend reflects several factors,, including rule and procedure changes that have led to submissions of far fewer frivolous or incomplete offers prepared by unscrupulous preparers.  Recently a company that called itself  “the nation’s largest tax resolution company” signed settlement agreements with 18 states, including Arizona and California that included making restitution payments of$1.5 million.

When I am contacted about the possibility of an offer, I will do an in depth telephone interview with the person to determine if he/she meets the minimum requirements of an offer.  In a nutshell, these requirements are having little or no equity in assets and little or no residual monthly income both at present or in future expectations.  If I feel the person is not a candidate for an offer for these or any other reason that would cause the offer to be rejected, I will discuss other means of resolving the debt. 

One such avenue is an installment agreement.  The IRS is reaching more installment agreements with taxpayers than ever before.  There are many types of installment agreements.  See my May, 2008 Tax Newsletter on my website www.rontaxcpa.com for a more detailed discussion of these discussion of these.  Click on the Newsletter tab and scroll to the bottom of the current month article.  It will be the third bullet from the top.

There is a further option that could be available.  If the IRS determines that a taxpayer is unable currently to pay any of his/her tax debt they may be placed on “currently not collectible” status.  This will delay collection activity until the person’s financial condition improves.  I have had clients remain in this status for years – if fact, in a couple of cases, until after the 10-year statute of limitations for collection expired and the debt became uncollectible by law.  During a temporary delay, the debt will increase due to the penalties and interest that still accrue during the hiatus.  While in this status, IRS will typically review the person’s financial status every one to two years.