Posted in: Blog, Posted On: 18-01-2014, Posted By: Steven Schroeder

Since 2007 more tax payers have been asking the question “what can be done if I owe back taxes to the Internal Revenue Service”, and the answer is “it depends”.

What can be done depends a lot on your individual facts and circumstances.  The Internal Revenue Service (“IRS”) has various options for taxpayers who owe back taxes, payment plans, Offers in Compromise, Bankruptcy, and Uncollectible Status are just a few.  This article will briefly look at two of the aforementioned options, the payment plan and Offer in Compromise.  

Payment Plans:  Under the “Fresh Start” initiative the IRS has revised the procedures for which a taxpayer can request a payment plan.  The new rules allow a taxpayer who owes less than $50,000 in back taxes to have up to 72 months to pay their tax obligation.  If you owe less than $10,000 your payment plan cannot be denied.  Taxpayers would request a payment plan by filing Form 9465.  Form 9465 can be filed either online at www.irs.gov or by mail.  

Offers in Compromise:  Offers in Compromise (“Offers”) are a means in which taxpayers can settle their outstanding tax debt for less than the full amount owed by making either a lump sum payment to the IRS or offering an amount that will be paid over a relatively short period of time.  

Offers are discretionary on the part of the IRS meaning that the IRS does not have to accept your Offer if they believe the taxes owed can be paid in full as a lump sum or over a period of time under a payment plan.  As such, in evaluating whether an Offer is acceptable the IRS will look at the taxpayer’s assets and income.

To submit an Offer taxpayers must submit Form 656 “Offer in Compromise” and Form 433-A (OIC) “Collection Information Statement for Wage Earners and Self-Employed Individuals” along with supporting documentation such as bank statements, pay stubs or if self-employed a profit and loss statement, and copies of their monthly living expenses.  There is a filing fee of $186 for submitting the Offer, and in a lump sum offer the taxpayer also has to enclose a check for 20% of the offered amount.

For example, if a taxpayer owes $50,000 in back taxes and their 656/ 433-A show a reasonable collection value for the case of $10,000 the taxpayer would submit their Offer with two checks, one check for $186 (Application Fee) and the second check for $2,000 representing the 20% down payment.

So how does one figure out how much to offer?  That is a good question and one where a tax attorneys experience really pays dividends.  In a lump sum Offer the IRS will take the taxpayers equity in assets and add that to the taxpayers excess monthly income (Household Income – Household Expenses) multiplied by 12.  These two figures added together represent what the IRS will view as a reasonable offer amount.  So the trick becomes how to exempt assets to reduce the collection value of those assets, and what expenses can we legitimately claim in order to reduce our excess monthly income.  However, going into the various exemptions and what qualifies as a legitimate household expense is beyond the scope of this article.

 

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