Newland & Associates frequently receives calls from taxpayers who have been intrigued by the advertisements of "tax professionals" who claim that they can get one’s tax debts settled for "pennies on the dollar." Sometimes the caller wants to ask us if this is possible. Other times, the caller has already paid handsome fees to the "tax professional" and is calling us for assistance because after much time it has become apparent that the promised results will never be obtained and the IRS is "knocking on the door."
Unfortunately, the latter category of callers has learned the hard way that there is rarely such a thing as "pennies on the dollar." While it’s true that the IRS does provide a legitimate way to settle a federal tax debt – it’s called an "Offer in Compromise" ("OIC") – taxpayers need to realize that this does not mean that the IRS will accept much less than full payment for any tax assessment just because the taxpayer does not have funds readily available. An OIC must be prepared according to very specific guidelines and it must be based on one, or a combination of, three reasons:
(1) Doubt as to Liability;
(2) Doubt as to Collectibility; and
(3) Effective Tax Administration.
Many factors, including the specifics of the taxpayer’s unique situation, are taken into consideration by the IRS when evaluating an OIC. Substantial supporting documentation is required.
When it comes to offers based on doubt as to collectibility -- i.e., where the taxpayer cannot afford to pay the tax liability in full, the IRS has very precise guidelines that control how much the IRS will accept to settle the tax debt. The basic guidelines are set forth in Part 5, Chapter 8, of the IRS's internal operational manual, called the "Internal Revenue Manual," relevant provisions of which are available online at http://www.irs.gov/irm/part5/irm_05-008-001.html. The IRS offers a more taxpayer-friendly explanation of these standards in an article called "Collection Financial Standards," at http://www.irs.gov/individuals/article/0,,id=96543,00.html. In general, the IRS will determine, based on financial information submitted by the taxpayer, how much it thinks the taxpayer can afford to pay, and then will compute the total amount that must be paid, based on the proposed payment terms. For more information on this, see the Instructions to IRS Form 656 ("Offer in Compromise").
Anyone who studies the IRS guidelines will conclude that settling a tax debt for "pennies on the dollar" is simply not possible in most cases. Perhaps those tax professionals who advertise settlements for "pennies on the dollar" really mean something closer to "ninety-nine pennies on the dollar."
In responding to the question -- "Can taxes be settled by offering pennies on the dollar?" -- the IRS website says:
OICs must include an amount equal to or greater than the total value of all
assets, plus future income. That total is generally the reasonable collection
potential amount, and not simply an offer of ten cents on the dollar, or a
percentage of the debt. A consumer alert has been issued advising taxpayers to
beware of promoters' claims that tax debts can be settled for "pennies on
OICs must include an amount equal to or greater than the total value of all assets, plus future income. That total is generally the reasonable collection potential amount, and not simply an offer of ten cents on the dollar, or a percentage of the debt. A consumer alert has been issued advising taxpayers to beware of promoters' claims that tax debts can be settled for "pennies on the dollar."
For a copy of the IRS consumer alert, or news release, on "pennies on the dollar" pitches, see the IRS warning, "Check Carefully Before Applying for Offers in Compromise" on the IRS website.
An Offer in Compromise can be an important tool in working out one's tax problems, but it will not usually produce the sort of windfall suggested by the "pennies on the dollar" advertisements.
For more information on Offers in Compromise, see the following discussions on this Web site:
(a) "Offer in Compromise Guidelines";
(b) "An Offer You Can’t Refuse" (Tax & Business Insights, March/April 1999); and
(c) "IRS Offers in Compromise = Frustration" (two parts, Tax & Business Insights, March/April 2005 and May/June 2005)
In addition to the "pennies on a dollar" promise, there are many other schemes that taxpayers may hear about that will supposedly help one avoid paying taxes. Such schemes should immediately bring this to mind the old saying– "If it seems too good to be true, it is!" Of course, the IRS is aware of these schemes. In fact, one can find a great deal of information about such scams on the IRS Web site on the page Tax Scams - How to Recognize and Avoid Them.
If you have need for assistance with an Offer in Compromise, please contact Newland & Associates, at (703) 330-0000.
By Tax and Business Professionals, Inc.
9837 Business Way
Manassas, VA 20110
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