Reduce your tax liability

Dear Bonnie: With interest and penalties I believe I owe $90,000 of ‘06 and ‘08 federal taxes plus year to date ‘10 taxes.  I have a couple illnesses.  One is seriously debilitating and periodically impacts income and the other is terminal.

I spoke to an IRS agent who said they don’t care about the illnesses. They are inclined to put liens on everything (I have nothing – a car, and an almost empty bank account).  Then they will attempt to collect as much per month as they think I can pay. Later they will renegotiate if I’m sicker.

This agent said an offer in compromise is for remaining penalties and interest or when one spouse dies leaving hardship and does not apply to my situation.

What do you think?  – James, El Verano

Dear James:  I think you ran into a bully! Most IRS agents are sympathetic and willing to work with taxpayers who voluntarily come forward to resolve their delinquent tax liabilities.

The logic behind an offer in compromise is this: If it doesn’t look like there’s a snowball’s chance in hell of collecting the debt (including the continually mounting penalties and interest) in the taxpayer’s lifetime, the IRS is inclined to consider an offer in compromise.

I’m surprised the IRS agent you spoke with didn’t suggest you go for it. After all, unless there’s something you didn’t tell me, (like you have an extensive collection of Van Gogh’s valued at $10 million), you sound like an ideal candidate.

A surviving spouse in a hardship situation is an ideal candidate but not just for the accrued penalties and interest. In fact, when you apply for an OIC on form 656, you list the tax years you want to include in the offer. The tax as well as the penalties and interest are compromised in an accepted offer.

Other ideal candidates include: unemployed taxpayers with no prospects and a looming statute of limitations on the tax liabilities in question, low income or unemployed surviving spouses – especially those with children, elderly low income with no assets, self-employed individuals with a track record of low income. Pretty much anyone with no assets, no or low income, mental and physical disabilities have a pretty good shot at compromising their tax bills.

Thanks for writing. – Bonnie Lee

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service who founded Symmetry Business Services in 1982 to represent taxpayers in audits, offers in compromise, tax problem resolution, tax preparation, tax planning, and to help non-filers safely re-enter the tax system. She is the author of “Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn’t Want You to Know.”  You can hear her radio show on SunFM 91.3 on Tuesdays at 1 p.m.  Contact her at 935.1755 or bonnie@taxpertise.com.