If you go into something with a set of mistaken beliefs, what are the odds that someone will take advantage of you and mislead you? The world is complicated enough without trying to be an expert in every area. Humans, myself included, tend to compress knowledge and learnings for ease of storage and access. Remember this?
An apple a day, keeps the doctor away.– Unknown
I have no idea where that compressed wisdom comes from. These days, we have a bajillion inputs that our brain has to deal with. Sometimes that input process gets hacked and we are programmed with mistaken beliefs that our brain has been tricked into believing; usually through repetition or through mass media like television, radio, and internet. A seed is planted in your brain which leads you down the path to be influenced.
For people who owe tax debt, one of the hacked beliefs is the following:
“Can’t I just get the IRS to take a smaller amount and just ‘be done with it’” ?
Settling your tax debt
On any given day, 30% of the people I talk with about their tax debt think that if they wave some money at the IRS, the IRS will accept the money and erase the remaining tax debt. I’m not sure how this idea has taken such a firm hold in society. I’m sure one reason is the Offer in Compromise (OIC) program where it’s possible to settle for less, but it is a program which has a process that must be followed.
Think about getting your driver’s license. You take an exam to prove you know the rules of the road. You take a driver’s test. You take a vision test. They take your photo. You fill out your personal information. You get your driver’s license after completing those steps, not before. There is no shortcut — you cannot simply waive a Benjamin Franklin in the face of a DMV employee to get your license, right?
Credit card debt consolidation companies might be partially to blame for the ”let’s negotiate a reduction in what’s owed” idea.
These companies often advise their clients who have credit card debt to stop paying their credit cards and, instead, start paying the consolidation company to build up a cash pool that can be used to negotiate a reduced balance with the creditors. The client’s credit score is destroyed in the meantime and they’ll likely have a tax as a result of the credit card settlement, but the burden of the credit card debt is sometimes eased. The biggest difference between this type of negotiation (i.e. customer & private creditor and tax debtor & IRS) is the nature of the relationship between the two parties; one is a consumer business relationship and the other is a citizen governmental relationship
With a consumer business relationship, the business usually has a processes in place to deal with almost all scenarios but the overriding fundamental for the business is to be profitable. So, they will cut losses and account for some portion of their clients failing to repay their credit card bills. The overriding fundamental guiding the IRS is to collect tax according to the laws and statutes as authored by Congress. In other words, the government is not set up to play: Let’s make a deal.
Without getting into the technical nitty gritty of the Offer in Compromise (OIC) program, it is possible to settle your tax debt. You should know about how it works before applying for it. There are qualifications for it. There are some immediate disqualifications. Depending on how you got into tax debt, you will have to develop a new behavior around how you deal with tax.
Immediate disqualifications for the OIC program
Disqualification One – Equity in Assets
If you have assets that you can liquidate, this usually will be an OIC killer. What do I mean by assets? Money in a 401k or IRA, stocks, bonds or cash in a bank, or equity in your home. If you have more in your retirement plan than what you owe in back taxes, an OIC may not make sense. This still applies even if you are able to access the retirement funds.
If you are a homeowner and you have equity, the IRS will do a Quick Sale Price (QSP) calculation. It works like this:
(FMV – CMB) x 80% = QSP
- FMV – Fair market value, recent appraisal will be required
- CMB – Current mortgage balance
- QSP – Quick sale price
If QSP is more than the tax owed, then you could sell your house and pay off the IRS in full. Why should the government accept anything less?
Disqualification Two – Dissipated assets
If you’ve accessed a lump sum of money in the three years prior to your attempt for settlement, you will be denied. Let’s say you sold your home and realized profits while having a tax debt. If those profits were similarly sized as your tax debt, the IRS won’t settle with you now. They might forget in three years.
If you cashed out your retirement and didn’t pay the tax, and the amount you received was close to the amount you owe, then the IRS won’t settle with you for at least 3 years from the date of receipt of that money.
These two scenarios illustrate what the IRS calls a dissipated asset. You had the money to repay your tax debt but chose to spend it another way. A dissipated asset temporarily disqualifies you from the offer in compromise.
Disqualification Three – Exceptional standard of living
As I mentioned before, the OIC is a program for which you have to qualify. Those qualifications involve sharing your income and expenses and comparing your figures to the national, regional, and local standards for: housing & utilities, food, clothing, and other expenses, such as transportation — operation & maintenance of your vehicle, health insurance, and taxes.
If your standard of living exceeds the standards, an OIC won’t work. Why should the IRS accept less tax than you owe when you drive a vehicle with a $800 payment instead of one with an allowable $500 payment? Why should the IRS accept less than what you owe when you pay $2800 for housing & utilities when the local allowable standard is $1800.
This is a common sore point for many people who owe tax debt. They feel like the standards are not accurate for the area where they live. However, often, they live unapologetically in the nicest part of town.
If you’re thinking about trying to settle your tax debt and the disqualifiers don’t apply, and want to talk about next steps, reach out via email or via phone 312-529-5009. We can talk about next steps – no pressure, I promise.