IRS OIC program – File Old Tax Returns

The Truth About Settling Tax Debt For “Pennies On The Dollar”

The most overused, deceptive, tax relief advertising catch phrase ever!

It is not uncommon for taxpayers to contact us and tell us that they want to apply for “that program” where they can settle their debt for a fraction of what they owe. They will often tell us that they saw some ad, web site, or a salesmen told them that they could settle their tax debt for some fixed percentage or a fraction of what they owe. However, this is blatantly incorrect. There is no (absolutely no) provision in the tax code for allowing a taxpayer to pay some set percentage of their tax liability and just calling it good. It has never existed, and most likely never will.

So what exactly does “pennies on the dollar” refer to? It is a reference to the IRS Offer in Compromise (OIC) program, which allows eligible tax debtors to pay the IRS an amount of money that is less than what they owe in order to wipe out their entire tax liability.

The phrase “pennies on the dollar” was actually determined several years ago by the IRS to be a form of deceptive advertising, and they explicitly instruct licensed practitioners that the use of this phrase is a violation of Circular 230, which is the practitioner behavior handbook for working with the IRS. However, since the IRS doesn’t have jurisdiction over firms that just market these services, it comes into the FTC’s purview to look out for these deceptive marketing practices.

In advertising, you’ll hear companies talk about settling for 20%, 10%, or even less. These ads, and the sales people you talk to on the phone, are trying to sell you an OIC service package. Many of their web sites even have little interactive calculators where you type in how much you owe the IRS, and it’ll spit out a, “You may only have to pay $xxx” message.

Instead, the amount of your OIC settlement is calculated using a very, very strict formula… and that formula is NOT secret — it’s available on a worksheet in IRS publication 656B.

Based on this formula, if you have equity in assets that exceeds your tax debt, you simply don’t qualify. Period. End of story. For most individuals, the common thing is going to be equity in your house or rental properties, or perhaps equity in a collection of classic cars, stamps, coins, guns, art, etc. If the value of ANY of that stuff is greater than your tax debt, you do not qualify for the OIC program – there is no way around this.

In the same vein, if you are a high income earner, it’s also highly unlikely you will qualify for the OIC program. The reason for this is that the IRS only allows certain amounts of money every month as “eligible expenses” for housing, cars, food, etc. If your lifestyle exceeds these amounts, the IRS doesn’t care — they will only allow you to claim the National Standard expenses. Any monthly income over those amounts gets multiplied by either 12 or 24, and THAT number goes into your offer amount.

In these circumstances, you may qualify for a period of up to 12 months to make a “lifestyle adjustment,” and reduce your living expenses to come into line with IRS standards. This will often involve selling luxury homes and getting rid of toys such as cars and boats. Keep in mind that these items are all covered by your tax lien, so any proceeds from the sale of these items technically is owned by the IRS, and should be paid over to them. A good tax representative can assist you with structuring these sales so that both you and the IRS get something out of it.

Beware of anybody promising that your tax debt can be settled for some fixed percentage of the debt. That’s not the way it works, and never has. Anybody trying to sell you on that idea is OUTRIGHT LYING TO YOU, and you should seek assistance elsewhere.

Do you need help with a back tax matter? Visit our Got IRS Debt page and enter your information in the box on the left for a FREE 30 minute Tax Debt Settlement Analysis. This analysis, valued at $197, will look at your situation and tell you what IRS programs you qualify for to settle your IRS headaches once and for all. Alternatively, you can simply call us at the number in the upper right portion of this page and we’d be happy to schedule an appointment time for you.

2014 IRS Collection Statistics

The U.S. Internal Revenue Service is the single largest collections agency in the world. We always find it kind of cool to analyze the collections data that is released every year. It always provides some insight into what is going on in the “delinquent” or “unfiled” tax return world. Since filing old tax returns is what this site is all about, here are some interesting tidbits from the most recent statistics available:

Budget & Personnel
In 2014 the IRS spent $11.6 billion and employed just over 84,000 to collect more than $3.1 trillion in tax revenue. Of those 84,000 personnel, over 18,000 are directly involved in enforced collections against taxpayers that owe back taxes. In 2013 the IRS spent $11.6 billion to collect $2.8 trillion in tax revenue, using just under 87,000 employees, of which 19,000 were involved in enforced collections.

Delinquent Tax Return Inventory
In 2014 the IRS began with 11.7 million delinquent accounts (unfiled returns). 7.6 million new cases were added to inventory while only 6.9 million were closed. This put the ending inventory at 12.4 million returns. In 2013 the IRS saw 7.7 million new cases added to inventory but they were able to close 7.5 million.

Examinations
In 2013 there were 145.2 million individual tax returns filed, of which 1.2 million were selected for review (audit) in 2014. Thus the effective audit rate was 0.9%. Of those returns examined, the IRS proposed changes in 87% of them with an associated $11.8 billion increase in taxes owed. For the returns that were reviewed in 2013, the audit rate was 1%, the IRS proposed changes in 89% of what it reviewed with an associated tax increase of $14 billion.

Enforcement
In 2014 the IRS filed 535 million Federal tax liens against taxpayers. This was a 11% decline when compared to 2013. Likewise, 432,000 seizures were conducted, which was down 21% from the prior year. However, 1.9 billion levy notices were filed against taxpayers which was a 7.6% increase over 2013.

Offers In Compromise
In 2014 the IRS received 68,000 offers where taxpayers attempted to settle their tax debt for less than what was owed. Of that number, the IRS accepted 27,000, which was a 12.9% decline from what the agency accepted in 2013.

What Does This All Mean?
The summary version of the above is that:

IRS budget cuts are forcing the agency to collect more tax revenue (current and delinquent) with a reduced staff
While the number of “new” unfiled returns added to inventory is increasing, the IRS isn’t able to close the gap on the case load
The IRS is examining fewer returns and enforced collections are down
All those commercials touting that you can settle your taxes for “pennies on the dollar” apparently don’t want you to read the IRS Consumer Alert about such statements. They also don’t want you to know that the IRS only accepts less than approximately 45% of the offers it receives

We always tell our clients that while the IRS may be slow, they eventually do catch up with you. If you are facing a tax problem, please know that “hoping” it will go away is not the answer. The last thing you want is for the IRS to reach into your bank account on grocery day and take everything you’ve got in the account because you didn’t respond to the dozens of letters they sent you. Didn’t get the letter? The IRS doesn’t care because from their viewpoint, just because you didn’t get it, didn’t mean we didn’t send it!

We’re always here to help you out. So if you’d like to discuss your situation or want to file any of those “delinquent” returns you’re sitting on, feel free to give us a call at the number listed in the upper right or shoot us an email to the address listed in the footer of this page.