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Deal with IRS directly in seeking settlement

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By Michelle Singeltary
Published:
Youíre deeply in debt to the Internal Revenue Service when you hear a radio ad promising to settle the bill for a fraction of what you owe.
There will be a team of tax experts, some of whom used to work for the IRS, to help you negotiate with the agency, the ad claims. Call for a free consultation.
So you make the call and your heart is thumping with the anticipation that youíll be rescued from most of your tax obligation.
But the ďrescueĒ could cost you thousands of dollars.
What the ad pitch doesnít tell you is that the claim hinges on your being approved for the IRSí Offer in Compromise program, or OIC, in which the agency agrees to accept less than your full tax payment under certain circumstances.
And you better believe the certain circumstances have to be dire. To qualify for an OIC, you have to show that you canít pay your full tax liability because it will create a financial hardship. And by hardship, the IRS means just that. It will look at your income and assets to determine your ability to pay.
The IRS says that absent special circumstances, an offer will not be accepted if it believes your debt can be paid in full as a lump sum or through a payment agreement. The IRS generally approves an OIC when the amount offered represents the most it can expect to collect within a reasonable period of time.
Last fiscal year, the agency received 74,000 requests for OICs and accepted 31,000 or about 42 percent. The previous year, only 38 percent were accepted.
The fact is most taxpayers donít get their tax debts settled for pennies on the dollar as touted in the ads, and in many cases the companies donít even follow through and send the necessary paperwork to the IRS requesting participation in the OIC program, the Federal Trade Commission warns in a consumer alert about tax relief companies.
The FTC notes that some taxpayers who have filed complaints said that after signing up with such a company and paying thousands of dollars in upfront fees ó money that could have been applied to their tax bills ó they were slammed with unauthorized charges to their credit cards or withdrawals from their bank accounts.
Moral of the story: Beware promises of instant tax relief.
Second moral: You can apply for relief yourself.
So, to pursue an OIC on your own, use the IRSí pre-qualifier tool at irs.gov to find out whether youíre eligible. An OIC requires a nonrefundable $186 application fee, unless you meet the low-income qualification. Youíll find instructions and the forms for submitting an offer in IRS Form 656 Booklet: Offer in Compromise. Itís important to note that your offer in compromise wonít be accepted if you arenít current with filing your returns. You also arenít eligible if you have an open bankruptcy case, because any outstanding tax debts will generally be handled within that process.
You should also keep in mind that the IRS will try to see if you are qualified for other payment programs. In fact, you have to exhaust other payment options before an OIC is accepted.
The agency has expanded and improved its help for struggling taxpayers. If you owe $50,000 or less in combined tax, penalties and interest, you can set up a payment agreement and pay off your debt within six years without having to submit a financial statement, and it can even be done online. You have to specify how much you can pay and the day of the month youíll be able to make the payments. Donít over-promise. This is one creditor you donít want to play around with.
An installment agreement requires a one-time $120 set-up fee. If you choose to pay through a direct debit from your bank account, the setup fee is reduced to $52. If you are a low-income taxpayer, you can apply for a setup fee of $43. Use IRS Form 13844 to request the reduced fee for an installment agreement.
With the online payment agreement, no paperwork is required and you donít have to call or visit an IRS office. But if you find the online process intimidating or confusing, call the IRS at 800-829-1040 to discuss your situation.
Donít let the April 15 deadline for filing returns make you panic if you owe the government and canít pay. You have some options. But you probably wonít find them in radio or television ads.
Michelle Singletary: michelle.singletary@washpost.com.
Washington Post Writers Group
Story tags » Personal Finance

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