Posted on September 7, 2015May 31, 2016 by Jan Roberg

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

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 Zillow.com. 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

Posted on July 23, 2013May 31, 2016 by Jan Roberg

What Can an Enrolled Agent Do for Me that I Can’t Do Myself?

Photo by T M Tonmoy Islam @Flickr.com

The other day at a networking meeting I was asked the question, “What Can an Enrolled Agent Do for Me?” I really had to think about that. You see, I had two different answers: The first one was, “nothing” and the second one was, “everything.” Both answers are right. Let me explain.

An Enrolled Agent is someone who is licensed by the Department of the Treasury to represent taxpayers like yourself in front of the IRS. Let’s say you are getting audited, you can hire an Enrolled Agent to help you through it. If you have an Enrolled Agent, you don’t have to talk to the IRS at all; the EA can do all the talking for you. That’s probably one of the biggest advantages.

You can represent yourself, but most taxpayers really should not try to represent themselves during an IRS audit. You’ve probably heard the saying, “The defendant who tries to represent himself in court has a fool for an attorney.” It’s pretty much the same in an audit. Honest, intelligent people can get themselves tripped up by the IRS.

For example: one taxpayer was trying to represent herself when the IRS denied her refund claim on an amended return. She had made numerous phone calls and written letters to the IRS explaining her claim, but was getting nowhere. When she called me in, I discovered that she had been responding to what she “thought” was the problem, not what the IRS was asking for. It’s actually a fairly common mistake—talking to the IRS can be confusing.

Another issue is debt resolution. You might have seen those tacky TV commercials where the little old lady says, “I settled my taxes for pennies on the dollar.” That’s known as an Offer in Compromise (OIC). And while that company is out of business now (they used some questionable practices) an Offer in Compromise is something that an Enrolled Agent can do for you. But there’s a really important thing about preparing an Offer In Compromise in the first place: it’s knowing if you really need one in the first place. For example: I once received a call from a woman who wanted me to prepare an OIC for her because the IRS said she owed them $15,000. Well, I could have just done the OIC paperwork, but I reviewed her tax returns first and found that the IRS actually owed her $8,000 instead. An $8,000 refund is a whole lot better than paying anything to the IRS isn‘t it?

Enrolled Agents are required to prove their competence in all areas of taxation, representation and ethics before they can practice before the IRS by passing a three-part federal exam. All enrolled agents specialize in taxation. This is very different from attorneys or CPAs who are licensed by their respective states and may not specialize in taxation at all.

An Enrolled Agent can prepare a tax return, represent you in an audit, and help you settle your IRS debt. Some Enrolled Agents can even represent you in Tax Court, but only those EAs that have passed a special Tax Court exam can do that.

The Enrolled Agent designation was created back in 1884 when Congress passed the Horse Act. At the time there were lots of dubious claims for Civil War reparations—there were more claims for horses then there were horses lost in the Civil War. Most of the dubious claims were from agents representing the people with claims as most of the agents were scam artists and con men. Congress decided that the agents needed to be regulated. They created a standard which required suitability checks, criminal record checks, moral character, and testing. When the income tax was passed in 1913, the role of Enrolled Agent was expanded to include claims for relief of citizens whose taxes had become inequitable. As tax regulations became more cumbersome and complex, the role for EAs kept expanding.

As an Enrolled Agent, I can do a lot to help you with your taxes; but, I’m no longer able to get Congress to give you a horse.

For more EA information you can check out the McTax Hangout video: https://plus.google.com/u/0/106432421922678528479/posts/iKYcxFGzZjn?cfem=1

Posted on October 9, 2012May 31, 2016 by Jan Roberg

What to Do if You Owe the IRS Lots of Money

Photo by splorp on Flickr.com

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.