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.
Arthur Weiss, Esquire
Law Office of Arthur Weiss, P.C.
2135 Grant Rd.
Tucson, AZ 85719