Q&A with Travis Watkins
Loosened IRS guidelines make
It easier to settle tax debts
Q: I understand the Internal Revenue Service has changed the rules for settling tax debt for less than a taxpayer owes through the offer in compromise program. How does the process work?
A: If the IRS approves your offer in compromise (OIC), your entire tax debt is forgiven when you pay the accepted offered amount. Since savings can be substantial, OIC requirements are strict. The IRS considers the equity you have in assets that could be seized for full payment, as well as the disposable income (i.e. your income less allowable expenses) you could pay each month toward your total tax debt. The OIC rules changed recently, for the better. The IRS still looks at assets that could be seized to pay the total debt, but the disposable income you must pay has been reduced significantly. The monthly amount of disposable income used to be multiplied by 48, but it is now multiplied by 12. For instance, if your income is $4,000 per month and your disposable income is $1,500, your OIC (plus asset equity) would be $1,500 times 12, or $30,000, versus $72,000 ($1,500 times 48) under the old rules. The IRS will average your last six months of disposable income if you are self-employed. If your total debt is under $50,000, you may qualify for a streamlined OIC, which receives less scrutiny from IRS examiners. These are big developments, but some of the new rules are expected to expire this summer.
Q: Why are so few offers in compromise approved?
A: Many taxpayers mistakenly believe the IRS will cut a deal because the government runs on deficits and massive spending. But you must provide supporting documentation for all your figures. Also, if you have assets, substantial home equity for instance, you must offer the value of those assets in your OIC calculations. Lastly, most taxpayers are unaware of the IRS' appeals program, which can be a game-changer.
Q: Do I need a lawyer to prepare my offer in compromise?
A: No. But representing yourself, you, even with a good offer, may get pressured into an installment agreement or a one-size-fits-all payment plan. I recommend using a local Oklahoma tax attorney who represents taxpayers before the IRS routinely and has high marks with the Better Business Bureau and a reputable peer review rating service like martindale.com. Most importantly, make sure your lawyer or tax professional will take your case on a flat-fee basis. There are unscrupulous national outfits that prey on taxpayers with big promises and low up-front costs with higher and higher recurring monthly charges.
PAULA BURKES, BUSINESS WRITER