One can think of many reasons for having tax problems. Tax problems can be caused by non filing, by filing and not paying your tax debt, by understatement of your income (underreporting), by owing payroll taxes and finally, among others, by tax audit.
Tax relief for your tax problem will not begin until you realize that you have a tax problem and that you need to confront it before your are hit by a bank levy, wage garnishment or other collection actions such as property seizure.
It helps that you believe that your issue can be solved through tax resolution. There is a tax solution out there that can be tailored to any tax problem. Specifically, if you owe back taxes to the IRS and you make good money but your tax debt is of such magnitude that you cannot pay that tax debt despite your good income, there is for sure a solution to your tax problem.
If you owe back taxes to the IRS but you have no money and no assets there is a specific tax relief for you as well. If you owe taxes and you make no money but do have some assets, you may have a different tax relief than the taxpayer who has no assets.
The tax relief that we spoke of will be one of three tax resolutions; no fourth. As we spoke in previous blogs, those are Installment Agreement, Offer in Compromise or be declared as Currently-Not-Collectible.
For our current purpose we want to explain Offer in Compromise. Simply stated, Offer in Compromise means that you will pay taxes less than your tax debt. How much less will depend on your financial situation.
Let us state at the outset that the IRS will not grant you a dime of tax relief unless they realize that all they can get to settle your tax debt is actually what you offered to them. Now we should cite some examples to illustrate the points that we are trying to make above.
You owe IRS $300,000 for back taxes when you were wheeling and dealing. Now you are retired and your only income is $1,000 from Social Security. Your monthly expenses are $1,100. You owe nothing in life and you don’t have an automobile. First: Do you qualify for Offer in Compromise? Second if you do, how much of the $300,000 IRS tax debt should we offer?
The answer is intuitive in this case. You have no assets and you have income less than your expenses. Because we cannot offer $0, we theoretically offer $1 to settle your $300,000 tax debt. Sounds unbelievable, but it’s the law.
You owe $13,000 of back taxes to the IRS and now we are motivated to settle the tax debt. You are on Social Security of $1,000 per month but you have $500 in the bank and a car worth $2,000. In this case we must offer the IRS the $500 that you have in the bank plus some percentage of the value of the car. The total that we will offer the IRS in this case as tax resolution to your IRS problem is a little over $2,000.
I am sure the question on everyone’s mind is: “You mean to tell me that you made an Offer in Compromise of $1 to settle $300,000 of tax debt and a little over $2,000 to as an IRS tax settlement for a tax debt of $13,000?” The answer is “YES” you are exactly right. Now then it is a high time for a general principle for negotiated IRS settlement. It is not how much IRS debt you owe, it is how much net assets you have and how much income left over your monthly expense that you can pay the IRS to settle your back taxes.
What happens to the interest and the penalty? Will you enjoy penalty abatement because of that offer? Absolutely. When you have an Offer in Compromise, you can kiss the penalty and interest goodbye. You are settling your tax debt for a specific amount. Your IRS tax settlement presumes that in the tax settlement you have sought tax relief of an abatement of penalty and interest as well.
Another question that’s frequently asked: Would they release my tax lien? The answer is yes. As soon as you pay the amount of your Offer in Compromise.