How to Settle Your IRS Debt for Less: Taking the First Step

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You’ve heard those commercials on the radio or seen them on late night television.  “Settle your debt with the IRS for pennies on the dollar!”  Those companies charge a lot of money for something called an “Offer in Compromise.”  I’ve dealt with a lot of people who’ve paid between $5,000 and $8,000 for those services and gotten nothing-NOTHING for their money.  That’s good money they could have used to pay off their debt!

So, before you spend that kind of money, you should see if you have a fighting chance at getting an Offer in Compromise (OIC) first.  And here’s the best part–you can test it out for free.  FREE!

The IRS has an Offer in Compromise Pre-Qualifier.  It’s a wonderful little tool that will let you know if you even have a shot at an OIC before you spend money trying to get one.  Here’s the link:  IRS Offer In Compromise Pre-Qualifier


The first page has some pretty basic questions.  Are you currently filing for bankruptcy?  The answer has to be no, you can’t have an OIC if you’re in bankruptcy.  If you’re in bankruptcy, you’ll have to wait until that’s over to file for an OIC.   The next question is have you filed all of your tax returns.  You have to say yes–otherwise the result will be no OIC.  You’ll have to file those returns before filing for OIC, but you’re just trying to figure out if you could qualify in the first place.

Same thing with making your tax payments.  Before you file for OIC, you’ll have to have your estimated payments caught up for the current year and self employed people must have their payroll deposits made.


So, just to get past the first page, you need to answer NO, YES, NA, NA.  If that’s not true, you’ll need to rectify the situation, but you need to answer that way just to get past that screen to get to the meat of the program.


The next page is about where you live and the amount of tax that you owe.  (This is one good reason why you need to file all of your returns before you make an offer–how can you settle your debt when you don’t know how much you owe?)  But this is just a pre-qualifier, it’s to see if you may be able to make an offer so make your best guess.


The reason they ask about where you live is because the cost of living is different in different areas.  A New Yorker will be able to claim more in housing expenses than someone from St. Louis because the cost of living is higher there.  On the flip side, New Yorkers don’t get an adjustment for their other expenses which can hurt them when trying to qualify for an OIC.  But that’s why the question about where you live is on the pre-qualifier.


This page also asks about your age.  If you’re over 65, they make a higher allowance for your out of pocket medical expenses.  That’s why that question is there.


From there, on the next page the IRS is looking at your equity–what are you worth financially?  How much money do you have in the bank?   What’s the value of your home?  How big is the loan on it?   How much is in your 401(k)?  Do you have any stocks?  How about the value of your car?  How much do you still owe on your car loan?   So where it asks for the equity in your car, it means what is the value right now minus how much you still owe on your car loan, that’s your car equity.


Home owners with a lot of equity and people with retirement assets often lose out right here.  If you have assets, the IRS figures you can sell them or cash them in to pay your IRS debt.  Be honest when filling this out (remember, no one is going to see it but you.)  If you apply for an OIC, the IRS will be able to substantiate everything you say, so you may as well tell the truth to yourself on the pre-qualifier.


If your assets are too high to qualify for an OIC, the pre-qualifer will stop right here.  You may want to double check your figures before giving up completely, but most likely you’ll need to pursue a different route to get settled with the IRS.


If you do get to the next section it’s all about your income.  Wages, interest, dividends, child support, alimony, distributions from partnerships and S corporations.  Anything else?  The IRS doesn’t care if it’s taxable income or not.  They include social security, pension income and even Veterans benefits as being money that you can use to pay your tax debt with.


The IRS is looking for monthly figures here.  So, let’s say you get paid every two weeks.  That means 26 paychecks a year.  You’ll take the gross on your pay stub multiply that by 26, and divide by 12 to get your monthly pay.  Lots of people would just double their pay check, because for the most part, you’re getting 2 checks a month.  But the IRS doesn’t count that it way.  They multiply by 26 and divide by 12 it makes a difference.  You need to know how they’re calculating if you want to win this game.


The next page is all about your expenses.  How much is your rent or mortgage?  How much do you pay on your cars?  What do you spend on gas and groceries?  Child care?  Child support?  Alimony?  Utilties?


Life insurance is on the list too.  Now what they mean here is term life insurance.  A whole life policy where it’s like an investment isn’t considered to be a cost of living expense, but term life is.


So now you’ve input your income, your expenses, your debt and your equity and the IRS computer runs all these numbers together and either says you may or may not qualify for an Offer in Compromise.  It will also say what the IRS expects your offer to be given the information you put in.


Here’s the thing:  the IRS tool is only as good as the information you put in.  Most people do the IRS Pre-Qualifier the first time around just guessing at the answers.  (I think I’d get this much if I sold my house today, I’m guessing my loan balance is about $x.xx.)  This is just to get a ballpark.  To get a better picture, you’re going to want to really know what your home loan balance is.  Check out the fair market value of your house on  Really look at what you spend for your utilities.   Get the actual numbers off your pay stub and do the pre-qualifier again with the actual figures.


Does it still look like you can do this?  Great.  Remember, page one?  Make sure all of your returns are filed first and you know how much debt you owe.  Don’t be in bankruptcy.  And most importantly, make sure that if you need to be making estimated tax payments, you’re caught up with making them.  Make sure these issues are taken care of before you submit an actual offer.  I suggest hiring a professional to do this, but if you’re going to do it yourself, start with the Offer in Compromise Booklet, here’s the link to that:  Offer in Compromise Booklet


And if you don’t qualify for an Offer in Compromise?  That’s still not the end of the world.  If you have exceptional circumstances, like huge medical expenses, you may still be able to make an OIC.  Be aware that your chances are significantly lower for getting accepted, but you can still make the offer.   But you’re going to have to demonstrate that your circumstances are exceptional and that paying the tax would create an undue hardship.  This seems silly, but I cannot stress this enough–simply not wanting to pay your tax is not considered an undue hardship.  (I get asked that question all the time.)  Paying for chemotherapy treatment for a cancer patient, that might get you somewhere.


Even if you cannot qualify for an OIC, you can still work out a payment arrangement with the IRS to get the debt handled.   You’re just going to have to pay the full amount of your debt.


If you have the time, please answer a question about this blog post.  The following link will take you to my little two question survey.  Thanks.  Survey


Personal Budgeting – Is it for You?

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Individuals and corporations (as well as income from estates and trusts and estate and gift transfers) are all subject to taxes pending the presence of taxable income. Among one of the numerous benefits with budgeting is planning for the impact of these taxes. But first let’s look into why certain entities do and do not budget.


In a corporate setting, budgeting is a necessary part of the accounting system and managers often receive pay increases if production is within budget. Also, budgeting is imperative in corporations in order to stay current with the ever changing government regulations and to keep up with the current industry competition.


What about the small business level? Do you like to stay up late and write up budgets and proforma financial statements? Not everyone does. And in my opinion, not everyone has to. Jan and I have seen many successful small businesses who do not write up formal budgets for their businesses. It’s your choice but I am not against them whatsoever. Of course, the bigger your company is getting, the more likely you will want or even have to start creating budgets.


And you? Do you have a budget? Not your small business, not your S Corp, not your partnership, but YOU? Personal budgeting for some can be worse than going to the dentist. If a template is all that is holding you back, we have a free one in this blog and in the downloads tab on top of the website. This budget template has a very clean presentation and is nicely detailed. I am certain that you will like it.

RTS Personal Budget – Click to Download


The RTS Personal Annual Budget is available for download from this blog or from the downloads tab near the top of the website.


My point with this blog was not to tell you that budgeting will solve all of your problems and that once you create the perfect budget, the weight of the world will be lifted off your shoulders—although for some people it will. Making a budget is not imperative for your success – many Americans alike get up and go to work everyday, make a modest salary, and support a family with discretionary income leftover all without ever touching excel. Where am I getting at? If you don’t have a reason for making a budget, then you simply won’t. Money is different things to different people – a blog post in its own—and some people do not care to know how much money they are making on a monthly basis.


However, what about the gentleman who finds himself with enormous tax debt and needing to do an offer in compromise with the IRS? To do that, he has to do a 433-A (OIC) which asks you to provide monthly income and expenses–essential a monthly budget.


Will creating a budget reduce my taxes? Not necessarily. Whether you make a budget or not, your income will always be subject to taxes. However, it does help plan your tax liability and gives you a more accurate picture of what your taxes and tax bracket could be given accurate estimates.

What to Do if You Owe the IRS Lots of Money


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My phone’s been ringing off the hook this week and this seems to be the big question, “I owe the IRS a lot of money, what should I do?”


Although everyone’s situation will be different, here are some general guidelines that might help you muddle through this mess.


1.  First, and most important—don’t ignore the IRS.  Make sure you contact them, let them know you’re looking for a solution to the problem and keep them informed.  Your natural reaction may be to want to hide, but that won’t work.  Make them your ally, not your prosecutor.


2.  Second—and this is my big issue—do you really owe that much? The reason I ask is because often when people have huge debt, there’s a mistake in the taxes. Not always but quite often. If the IRS did your taxes for you—definitely check that option out. (The IRS doesn’t do taxes very well—no joke.)   I cannot tell you how many times I’ve completely cleared someone’s tax debt because their taxes were just done wrong in the first place.  More likely, I’ve reduced the debt to a more manageable amount.  The point is—getting a second opinion is usually a good idea.


3.  Could you afford to make a monthly payment?  Generally an installment agreement can be made for up to 6 years, but if you can pay off the debt in two or less that’s so much better.  The quick and dirty—if you owe less than $25,000, take that amount and divide by 60.  If you can pay that much a month then that’s your installment payment.  Remember, if you can pay more than the minimum—do it.  Penalties and interest keep adding on while you’re paying so the faster you pay it off, the better off you are.


4.  If you owe more than $25,000 or you can’t afford the minimum payment—you’ll need to provide the IRS with financial information to prove your situation.  At this point you may want some professional help to get you through the paperwork.  If you’re really broke, or unemployed, you might qualify for the currently uncollectable status.  It gives you a temporary break from making payments until you get back on your feet.  Unfortunately, penalties and interest keep getting added.


5.  One option may be an offer in compromise (OIC).  That’s where you offer the IRS a smaller amount of your debt –a compromise.  Watch out for those late night TV ads selling OICs.  Sadly, many of those companies are rip-offs.  They charge somewhere between $5000 to $8000 for the OIC but the fine print says “if an offer in compromise can’t be reached we will do an installment agreement.”  There’s a formula for doing an OIC—they pretty much know up front if you’ll qualify or not.  Paying $8000 for an installment agreement that you could negotiate yourself is a rip-off.  Ask lots of questions and get references.


6.  Another thing to look at is how old is the debt? Not only are you paying interest, there’s a late payment penalty of 1/2 of 1% per month up to 25%. If the debt is for 2011—well then you’re still paying that extra 1/2% per month—that’s an additional 6% per year on top of the IRS interest rate.   You might be better off putting the debt somewhere else. Most credit cards have higher rates than that, but if you’ve got access to cheaper credit elsewhere, that might be worth your while to pay the IRS debt off.


7.  Also, if this is only one year of taxes that you owe—then you might be able to have the penalties abated. If you have a couple of years of debt—that’s another story. Don’t ask for the penalty abatement until you’ve got the taxes paid off—otherwise they’ll just start accumulating all over again. But keep that in mind as you get closer to the payoff. A penalty abatement is where you ask them to take the penalties off your debt. Often, if this is the first time you’ve ever owed like this, you can get an “abatement.” That’s the word you want to use.


8.  Last but not least, if you got hit with a big tax bill, you need to make some adjustments to your withholding or estimated tax payments so that it doesn’t happen again.  Once or twice—okay that happens, but if this is happening every year, that’s just plain irresponsible.  If you have an offer in compromise and wind up with another tax debt—it can void the offer making you owe those taxes all over again.  It can also terminate your installment agreement. It’s really important to keep current with your taxes.

I Want to Settle My Tax Debt for “Pennies on the Dollar”

You’ve seen those late night TV ads with the little old lady who says that JK Harris settled her IRS tax debt for “pennies on the dollar.” Or maybe you’ve seen the red bearded guy who tells you his company, Tax Masters with its team of ex-IRS agents has helped “many good people just like you.”

And maybe you’ve wondered if they could help you too. Well no, they can’t. They’ve both filed for bankruptcy and their doors are shut. Part of the problem being was that their advertising was a little misleading.

Does that mean that you can’t settle your debt with the IRS for “pennies on the dollar”? No, that option is still available–it’s called an “Offer in Compromise”, but it’s not an option for everyone. An offer in compromise is only for people who genuinely can’t pay their tax bill–when all of their assets and future earnings are taken into account.

In 2010, there were over 57,000 Offer in Compromise applications submitted to the IRS–only 14,000 of them were accepted. Most of the problem with those rejected applications is that many people submitting Offers in Compromise don’t know the rules regarding spending and assets. When you’re filling out the form, you may say that your monthly mortgage payment is $2000, but the IRS has specific guidelines on what’s an allowable housing expense–if your payments don’t fall within the IRS guidelines, they don’t count. So if you live in an area where the IRS says that your monthly housing payment should only be $1500–that means you have $500 a month that the IRS says you can pay towards your tax bill–an offer would be unlikely. Now you don’t have an extra $500 a month, I get it–but to the IRS, if you owe them money, then you should live in a smaller house.

And although the IRS is rather generous about medical expenses–many of the alternative medicines and treatments are not considered to be “legitimate” medical expenses in an Offer in Compromise. So while the IRS would count your payments for your chemotherapy, they would take off the costs of the holistic vitamin program that you use. You need to keep that in mind if you’re using any kind of “unconventional” treatment. It doesn’t matter that it’s saving your life, if it’s not in the IRS book–it’s not a legitimate medical expense.

For an Offer in Compromise, there are national charts showing what you’re allowed to pay for food and clothing. There are charts for how much your housing should cost broken down by county. And there are different expense rules for senior citizens and younger folks as far as medical expenses are concerned. And you’ll have different rules for bus riders, car owners, and people who are still paying off their car. There’s a labyrinth of tax codes and charts to go through.

And I know this sounds harsh–but I want to make sure you understand how difficult it is to win an Offer in Compromise–if you have equity in your house–the IRS basically assumes that you can sell it for 20% less than what it’s worth and use that money to pay your tax bill. So basically, an Offer in Compromise isn’t usually a good option for homeowners with any equity.

If you don’t know the rules before submitting your application–you could lose before you even begin. That’s why it’s important to get professional help when submitting an Offer. And this is where it’s helpful to have someone who can meet with you in person, understand your situation, and fight for you because they know you’re a person and not just some file sitting on a desk. And if an Offer in Compromise isn’t the right choice for you then you can work together to come up with the best option that is available. And isn’t coming up with the best solution for you the whole point in the first place?

Things To Do If the IRS Threatens to Levy Your Bank Account

Tax Concept

If you’ve received an IRS notice saying that they intend to levy your bank accounts if you don’t pay up in 30 days, then it’s time to pay attention. Before the IRS actually issues a levy notice, they’ve usually made a few attempts at contacting you and trying to get a payment. If you’ve received an IRS levy notice, it means that the IRS hasn’t heard from you—they think you’ve been blowing them off (which in many cases is true). If you ignore the levy notice, they’ll just take your money and the law is on their side so you need to act now.

First, the responsible thing is to call them, or hire someone to deal with them for you. (I personally think that if you’ve reached this point, it’s best to hire someone—but remember, I do this for a living, so note that I’m biased.)

There are things you can do to prevent the IRS from going through with the levy. Let’s assume that you really do owe the money:

1. You can set up a payment arrangement–you pay off the IRS on a monthly bill schedule

2.Your situation might qualify you for an offer in compromise (the pennies on the dollar thing you see in TV commercials), or

3. Maybe you’re going through hard times and need to be put into the currently uncollectable status—you still owe, but the IRS quits hounding you until you get a job or your situation changes.

But maybe you don’t really owe the money. That’s the big kicker for me. Usually, if you’re getting IRS levy notices, you do owe them money—or at least part of it, but I have seen several cases where my clients don’t owe the IRS anything! A couple of times I have even gotten them refunds instead. If you didn’t do your taxes, and the IRS did them for you, don’t assume that the IRS did them right. When the IRS does your taxes for you, they automatically put you in the highest tax bracket they can justify and you get no deductions or tax credits that you might have qualified for. (Here’s a hint: if you’ve got kids, the IRS probably did your taxes wrong.) Even if you find that you don’t owe the IRS money—you still have to contact them, let them know the situation, and then you’re going to have to provide proof. Usually your proof is your corrected tax return.

Dealing with the IRS is the best way to get yourself out of levy trouble. But here are a few things that you also might want to consider doing while the threat of a levy is still hanging over your head:

1. Make sure your name is taken off of your kids’ and/or parents’ bank accounts. If you’re on someone else’s bank account, the IRS can and will levy that account too.

2. Don’t keep large amounts in your bank accounts. If you’ve got lots of cash, then maybe you can just pay your debt. But usually, this isn’t an option for most people. If your paycheck is going direct deposit into your bank account, get the money out immediately. You can put your cash onto a prepaid Visa debit card. Once the levy is in place, the IRS can only take the funds that are in your account at the time of the levy, if you get another deposit, that money is accessible. Transfer money in only as you need to make payments out of the account.

IRS levies are serious business. Don’t make the mistake of ignoring them.


Note:  We try to answer all the questions that come to us but please be patient.  It’s our busy season right now.  We may not get to your post until the weekend.  When you make a post and use the capcha code, it won’t immediately show up.  You see, for every normal person like you that posts, there’s about three advertisements for things your mother wouldn’t approve of.  (We try to keep this a G rated website.)   We have to edit those out.  If you need an answer right away, here are some links that might help:

EIC questions of any kind:–Use-the-EITC-Assistant-to-Find-Out-if-You-Should-Claim-it.

How to find free tax preparers:

How to find your local IRS office:

If you want to hire us, please call (314) 275-9160 or email us.  We do prepare returns for people all over the country (and a few foreign countries as well.)  We are sorry but we cannot prepare an EIC return for someone outside of the St. Louis area because of the due diligence requirements.

I Can’t Pay My Taxes, What Do I Do Now?

debt resolutionThe deadline is coming up, you’ve done your tax return and you’ve got a balance due.  Problem is:  you don’t have the cash to pay.  What can you do?

First, if you can’t pay the whole thing, pay as much as you can now.  The more you pay towards your tax, the less you’ll have to pay in interest and penalties.  Let’s say you owe $5000, you don’t have that much but you can scrape together $2000, mail in a check for the $2000.  Then you’re only dealing with interest and penalties on $3000 instead of $5000.  I find that paying something also helps you when you have to deal with the IRS.   They open their file and see that you paid something towards your account, it gives you credibility.

In a few weeks, you’ll get a letter from the IRS telling you that you owe them money.  When you get the letter, call the number on the letter and talk to the IRS.  (Use your good respectful voice that your mother taught you, I’m very serious about that.  If you curse at them or threaten them, it will go into your record.  It makes it much harder for me to save you after you’ve done that.)  When you talk to the IRS, these are going to be your options:

  1.  You may qualify to take up to 120 additional days to pay with no extra fee.  They will still charge interest.  If it’s possible for you to come up with the cash within 4 months, this is your best option.
  2. If you know that you won’t be able to pay off the debt within 120 days, you can apply for an installment agreement.  You pay a fee of $105 and set up a monthly payment schedule.  Generally, they like to set up a plan that has you pay off the money within two years.  You can make arrangements to pay the amount over 5 years.  Using that $5000 figure, if you pay it over 5 years it would be 5000 divided by 60 months = $83.33.  They will round it up to $85.  The problem with that is the interest will continue to accrue each month.  If you can pay it off faster, do so.

 You can apply for an installment agreement yourself online.  Go to the IRS website :,,id=149373,00.html

What about those ads I see for about settling your tax debt for “pennies on the dollar?”  Generally, those ads refer to something known as an offer in compromise.  Generally, the IRS will not accept an offer if it believes that you are capable of paying your debt.  For example, I once received a phone call from a fellow who said that he owed $20,000 in tax debt and he wanted me to prepare an offer in compromise for him.   I started asking some questions and found out that he made $200,000 a year, had substantial cash assets, and plenty of equity in his home.  I asked him why he didn’t just pay the tax, he told me “He didn’t want to.”   You have to be a good candidate for an offer in compromise before any reputable firm will make one for you.  That fellow would never qualify for an offer in compromise, the best he’d get is a monthly payment agreement and he could do that himself for free.

If you are truly in a situation where you cannot pay your tax debt, please get professional assistance.  Even if you don’t qualify for an offer in compromise, you may qualify for a reduced payment schedule until your situation improves.  Be sure to ask your accountant, “Do you handle debt resolution issues?”   Your corner tax store preparer is not trained to prepare the forms for an offer in compromise, and many CPAs don’t want to handle those issues.  Look for the phrase “debt resolution” when hiring this type of assistance.  Roberg Tax Solutions does debt resolution.  (Just thought I should make that point!)