Dear Bonnie: I owe the IRS a huge amount of money. My aunt died a few years ago and left me the proceeds from her IRA – about $200,000. I didn’t know that I would have to pay tax on it and I kind of blew the money. When I got my tax return done and found out how much I was going to owe, I nearly had a stroke. I couldn’t pay it so I’ve been hiding out. I got a letter last week and with penalties and interest I owe almost $100,000. I don’t make very much money so I don’t think I’d ever be able to pay them back. What can I do about this? It’s totally stressing me out.
– Stacey, Windsor
Dear Stacey: Thanks for writing. Well, I’ve got some really great news for you. The IRS announced on May 21 that it is expanding its Fresh Start program to include more favorable qualifications for its Offer in Compromise (OIC) program. Stacey, you’ve probably heard the commercials on TV and radio proclaiming the ability to “pay pennies on the dollar!” Well, in the past, it has not been that easy to settle up with the IRS for a reduced balance. Historically, the IRS accepts only about 34 percent of all offers that come through.
All that is about to change. And it sounds like you might qualify for this program.
There is still a set formula that the IRS uses to determine the amount they are willing to accept. But the variables are changing. This news is very exciting because the standards will be much more relaxed in order to help even more taxpayers land on their feet. Not only will more offers be accepted but the processing time (which can sometimes take up to a year but average about 6 months) will be decreased.
Here’s how it used to be: When you complete IRS Form 433-A to accompany the offer request, you state your monthly income and expenses. The difference between the two numbers is multiplied by 48 if you intend to pay off the offered amount in less than 5 months or it’s multiplied by 60 if you intend to pay it off over a longer period of time. So if your income is $3,000 per month and your “allowable” expenses (more on that later) are $2,900 per month and you intend to pay off the compromised balance immediately then the IRS, given all other qualifications have been met, will be willing to accept $4,800 plus the net “quick sale value” of your assets in which you have equity. It doesn’t matter if you owe them $10,000 or $100,000, this is what they are willing to accept.
You saw the little quote marks surrounding allowable expenses, right? This is where most taxpayers misunderstand how their offer is calculated. The IRS has a set of National Standards to determine expenses related to housing, transportation, and living expenses. So for example if your house payment is $2,500 per month but the National Standard for your particular area is $1,400 per month, the IRS will use that number instead. Live some place cheaper is their motto. As you can see, what you believe are your bona fide expenses may differ from what the IRS thinks they should be. It also would not consider unsecured debt. When it comes to monthly payments to credit card companies, the IRS’ stance is “Let them stand in line behind us.” That’s why it’s important to crunch your numbers with a tax pro who understands the OIC process to make sure you have a valid offer.
The IRS now has new National Standard tables for housing, transportation, and living expenses which are more relaxed. They are willing to accept higher costs. In fact, a miscellaneous allowance will be included where a certain percentage of credit card payments can be listed as an allowable expense. Previously, student loan payments and delinquent state and local income taxes were not allowable expenses but now those numbers will be considered in the formula.
The best news yet is that the multiplier is being reduced. Instead of taking the disposable income amount and multiplying it by 48 or 60, it will be multiplied by 12 or 24 respectively. And if you have income-producing assets in a viable on-going business, the equity in those assets will not be considered when adding the value of total assets to disposable income.
The IRS wants to work with taxpayers and businesses to ensure productivity in this bad economy. I would suggest you go to the IRS website and fill out Form 433-A. Take it to your tax pro to crunch the numbers to see if you can settle for “pennies on the dollar!”
Do not throw a bunch of money at a tax pro until she actually evaluates your completed form 433-A to see if you really qualify and projects how much the offer should be. Good luck!
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