Oftentimes, when people contact an attorney, for example, for a car accident, they say (or they think) that the way the negotiation happens is you’re on one side… let’s say the plaintiff’s lawyer is asking for $100,000 and the defense attorney is going to pay 5 and somehow they arrive at a number in the middle and they pay $50-60,000, and they think that’s how tax liabilities are negotiated and that’s how it ought to work. Click here to read or watch more IRS Help resources.
I’m here to tell you that’s not how it works at all. You see, the only way that the IRS can really compromise a liability, reduce that liability and forgive tax is through a program called the Offer in Compromise program.
There is actually three types of offers. There is something called a cash offer, a short term deferred offer and a long term deferred offer. I’m going to take this opportunity to explain each of those offers in just a moment.
Again, this is not a horse trading style negotiations, like there are in many lawyers negotiations; this boils down to numbers and figures and you end up arguing over things called allowable expenses.
Let me give you an idea of what a cash offer is. A cash offer is an offer payable within 5 months of the acceptance of the offer. Keep in mind, that’s not 5 months from today and it’s not 5 months from the date that the offer is filed; it’s 5 months from the date of the acceptance. At the time of the recording of this video, most offers are taking somewhere between 6 and 12 months, to be thoroughly investigated, and you either accept it or reject it.
The key there was accept it or reject it. There is a great number of offers that are actually rejected, and I think it’s in part because laypeople try to file their own offer in compromise, or because there is a great number of unscrupulous national tax resolution firms in the country that will file offers in compromise for just about anybody, whether they’re breathing or not or above ground or not, and that’s not something that we do here.
Of the offers that we actually file in our firm, we have a tremendous success rate for those that we actually file. You see, not every client is an offer in compromise when you call my law firm.
Let me tell you a little bit about a cash offer. A cash offer, as I said, was payable within 5 months of the acceptance of the offer, and it actually boils down to an algebra problem. Let me explain that. It goes like this:
Monthly disposable income x 48 + the value of your assets = the amount of the offer in compromise.
Let me put some numbers to that so that you can better understand because it’s hard to visualize.
If you had $50 a month monthly disposable income and you multiply that by 48 and then you added in the value of your assets, then that equals $2400 (assuming zero assets)
50 x 48 + value of your assets (0) = $2400
It doesn’t really matter how much you owe the IRS, whether you owed them $24,000 or $240,000; if we are successful in demonstrating that your monthly disposable income was $50 and you had zero in assets, then you should be able to settle your case with an offer in compromise for a cash offer of $2400.
What does monthly disposable income mean? Monthly disposable income is the difference between your total income and your monthly “allowable” expenses. I make the quotation marks because allowable means what the IRS says it means, there is actually national standards and there is charts and graphs where we can get the maximum allowable expense categories for a variety of things for housing and utilities, food, clothing and miscellaneous, transportation – and so on.
Let me explain the short term deferred offer. It’s similar to the cash offer but it’s a little bit different. A short term deferred offer is an offer payable within 24 months of the acceptance of the offer. The algebra problem goes like this:
Let’s use the example that we did before.
If you had $50 monthly disposable income and zero assets, it would go like this:
50 x 60 + 0 = $3000
$3000 24 = $125/month for two years.
Now you might ask yourself if all you can afford to pay is $50 and you’ve demonstrated that to the IRS, how in the world do they expect you to pay $125? Your guess is as good as mine, but I can tell you in practice what happens is friends or relatives usually make up that difference between the $50 and the $125 by loaning $75/month or making the payment for the taxpayer. So that’s the short term deferred offer.
A long term deferred offer is actually an offer that’s payable over the number of months remaining on the collection statute. I actually did a whole separate video about what the collection statute is, but let’s suffice to say that in this particular case, it’s going to be 10 years.
Let’s say you just filed your returns and there is 10 years for the IRS to go ahead and try to collect from you. So if there was 10 years left, then your offer and calculation would go like this:
Assuming $50 monthly disposable income and zero assets, it would go like this:
50 x 120 + 0 = $6000
$6000 120 = $50/month for 10 years.
Would I actually advise you to do that? Probably not. I think 10 years is a really long time and keep in mind, you have to make those payments on time perfectly for 10 years without making a mistake. If you make a mistake, they’re going to revoke your offer and all of the tax penalties and interests are going to come back rolling back and you’re going to have an even bigger problem on your hands.
Now there is something very important that I wanted to tell you about the offer in compromise and that is, that after your offer is accepted, your tax liens will be released, will be extinguished, you won’t owe any more money, so there is no penalties and interest (that’s a good deal), but there is also a 5-year probationary period after an accepted offer in compromise.
What does that mean? That means you have to file and pay on time, no exceptions, for five years. But hey, you’re supposed to file and pay on time anyway. So once you’ve been through this hell and someone has actually helped you get out of it, I think that’s the least that they can ask of you is to file and pay on time.
There is really no other way to negotiate with the IRS in terms of reducing actual tax, unless you’re going to argue that you don’t the tax in the first place.