Can they really reduce my tax debt
?
Harry Jones has not filed his federal tax return since
1999. When
he finally got around to filing in 2007, his tax debt with penalties
and interest was over $100,000. He called one of those late night
TV tax relief companies who promised to reduce his debt “up to
90%.” Is this possible? The good news is that it may
be possible. However, the likelihood of reducing the debt by even
1% is very slim. Theoretically it is possible that the moon will
collide with the earth on Thursday. The likelihood is nil. It is
the same thing with tax debt.
What does it take to reduce tax debt? The
IRS will consider reducing your tax debt if they feel that the reduction
is in the best interest of the government and if they determine that
your offer is the best they can get from you within the timeframe they
have to collect your tax debt.
Let’s get more specific and complicated. Harry
owes $100,000 from nine years of tax returns that he just had filed. He
certainly does not have that kind of money and will never have it. A
single man with no children, Harry works as a bus driver for the city
and makes only $45,000 a year. After expenses he has little left. He
figures he can pay $10,000 by borrowing from relatives and cashing in
a small retirement account. Will the IRS accept this?
The first
step in the analysis involves something the IRS calls the CSED – the
collection statutory expiration date. Since Harry just filed the
returns, the IRS has a very long time to collect this debt, approximately
ten years (120 months) under federal tax law. The IRS is
going to look at Harry’s income and expenses to see if there is
anything left over from Harry’s monthly pay that the IRS can take. In
this case, Harry takes home $3,200 a month after payroll taxes. The
IRS determines that his allowable expenses are $2,800 a month including
the usual stuff, rent, utilities, gas, car payment, etc. This leaves
$400 a month left ($3,200 - $2,800). The IRS will conclude
that Harry can pay $400 a month for the next 120 months for a total of
$48,000. Why would the IRS accept Harry’s meager offer of
$10,000 when they know they can get almost five times that by waiting? The
answer – they won’t.
Harry also had to report his assets and
liabilities – what he owned
and how much he owed. Turns out Harry owns a house worth $235,000
but only owes $100,000 on it. The IRS will use certain formulas
to determine that the house can be used to pay off part or all of the
tax debt. Add the equity in the home to the $48,000 that Harry
can pay from his salary every month and the IRS will conclude, rightfully
so, that Harry can fully pay the tax debt over time. The IRS will
then notify Harry that his offer of $10,000 is rejected and that he should
immediately start making $400 payments while arranging for an equity
loan on his house.
As if the above was not a gloomy enough picture, Harry bought a car three
years ago and is making payments of $455 a month. He has two years
of payments left on the five year loan. This means that in
24 months Harry’s ability to pay the IRS will increase by $455
a month. This is referred to as ‘future income’ and
the IRS will want it.
The important thing to note in trying to
answer the question in the title to this article is this: The
IRS will only reduce your tax debt if they determine that the reduction
is the best they can do within the CSED. The IRS uses precise
calculations to determine how much you can pay and cannot vary from those
numbers. The tax relief
companies lure you into thinking they can “negotiate” with
the IRS on your behalf to reduce the debt. Hogwash. Ninety
percent reduction in your debt – maybe if you are living in a
tunnel below the freeway with only $37 to your name. Then the IRS
may accept the $37!
Be careful when using the services of any company
that promises a reduction in your tax liability or the elimination of
interest and penalties. These
reductions are rare and only arise if the IRS determines that the government
cannot do better.
