The IRS has released good news for individuals who have tax debts they can’t pay. Whether you’ll actually be able to take advantage of that news is another matter. And whether you can obtain good professional help with the problem is yet another matter.
First the good news
Sometimes people find themselves in a situation where they owe more money to the IRS than they can possibly pay. That’s bad for the taxpayer, as IRS collection efforts continue for many years, making it difficult to make any headway financially. It’s bad for the IRS as well, as they devote resources to the pursuit of amounts that will ultimately be noncollectable.
There’s a way out of this mess, and it’s called the offer in compromise, or OIC. You have to meet a number of requirements to move through this program, but if you succeed, you can wipe the slate clean by meeting a reasonable payment obligation over a limited period of time.
One of the problems with this program has been overly strict rules for determining the amount you have to pay in order to get off the hook. And this is where we have good news: the IRS has announced more flexible payment terms as part of something they call a “Fresh Start” initiative. Here are some of the key points:
- Some taxpayers will be able to resolve their problems in as little as two years, compared with four or five in the past.
- The tax obligation may be adjusted to permit you to make payments on a student loan.
- If you also owe state and local taxes, your federal tax obligation may be adjusted to permit you to pay those other taxes.
- The Allowable Living Expense permitted to an OIC applicant may be more generous than it was in the past.
But don’t hold your breath
Unfortunately, the OIC program has been plagued with delays, and the problem has gotten worse in recent years as a weak economy has made it difficult for some individuals to meet their tax obligations. A recent report by an office known as the Treasury Inspector General for Tax Administration, or TIGTA, found that the number of offers has increased while the resources available to process them have decreased. The IRS responds that it is taking steps to reduce the backlog, but it seems to us we’ve heard that promise before. If you’re filing an offer in compromise, be prepared for an extended wait before you learn whether it has been approved.
Tax resolution services
It’s possible to work through the offer in compromise process without the help of a professional. If you want to give it a try, you’ll probably want to start at this page of the IRS website. The process is a bit daunting, though. You have to work through the detailed requirements and prepare some lengthy forms. A qualified pro can handle the paperwork and make sure you haven’t shot yourself in the foot by filing an OIC that has no chance of being accepted.
Unfortunately this field has been plagued by shady firms that make unrealistic promises to settle your tax debt for pennies on the dollar, collect a big up-front fee, and then provide inadequate services or none at all, allegedly swindling taxpayers out of tens of millions of dollars. Some of the worst have been put out of business, but there’s little reason to believe all the bad actors have been eliminated.
Various government agencies have an eye on this area, including the Federal Trade Commission and the Consumer Financial Protection Bureau. Recently the director of the IRS Office of Professional Responsibility spoke at a meeting of companies in this industry. She said Circular 230, a Treasury document detailing rules for those who practice before the IRS, applies to firms and individuals offering these services, and her office will be contacting some of them based on what they’ve seen in ads.
No doubt many tax resolution firms offer quality services at reasonable prices. It pays to be cautious before signing on, however, especially if the arrangement involves a large up-front fee. This caution applies to firms you may see advertised on this website, as they have not been screened by Fairmark.