June 24, 2019

Settle Your IRS Debts for Pennies on the Dollar

No money in a bagThe tax return is filed and the taxpayer cannot pay the taxes.

Then comes a letter from the IRS demanding payment.

The taxpayer sees a nifty ad in the newspaper or on TV screaming “Settle your tax debt for pennies on the dollar!”  Should the taxpayer hold out hope for salvation?

This is almost always a promise of salvation provided by unsavory operators who prey on tardy taxpayers promising relief from unpaid income taxes. Almost certainly these claims of settling IRS debts “for pennies on the dollar” are not real.  The firms marketing them are generally not legitimate.

The IRS offer in compromise

​In some instances the Internal Revenue Service will agree to a debt settlement that is known as an offer in compromise.  However, the process is quite lengthy and very complicated.  In addition, very few offers in compromise are approved. Legitimate tax practitioners know this and seldom recommend an offer in compromise unless there is some reasonable basis for belief that it might work. Even then, relatively few offers in compromise are approved.

​[warning]Beware of the companies that make extravagant claims about what they can do.  Remember, if it sounds too good to be true, the chances are 99.99% that it is not true.[/warning]

​There are alternatives to offers in compromise that will not work

Why would a company represent that they could settle tax debt for pennies on the dollar when it is simply not true.  The answer is simple: MONEY.  These companies routinely charge $2,500, $3,500 or more.  Generally, they will file an offer in compromise even though they know that it will not be accepted.  However, the IRS will suspend collection activity while it considers the offer.  Immediate tax relief that will be very short lived.  Eventually, the tax may will be back, and the poor soul is many dollars lighter than he was and is no better off.

[tip]In situations where the taxpayer simply cannot pay, the IRS will often place the case in uncollectible status.  It will stop collection efforts.  The IRS will routinely enter into part payment agreements wherein the tax payer will make payments on the obligation over a period of time.  Again, the collection efforts stop.  Finally, under certain circumstances, income taxes can be discharged in a Chapter 7 bankruptcy case.  Generally, the tax must be over three years old, returns must have been filed over two years ago, and  the taxes must have been assessed at lease 240 days prior to the bankruptcy filing.  Tax discharge in bankruptcy is extremely complicated and potential filers should seek the advice of an experienced bankruptcy practitioner.[/tip]

If you cannot pay your taxes in full and on time, you have more than a “tax problem.” A bankruptcy counseling session will highlight options, including but not limited to filing for bankruptcy protection. The most difficult step is walking into my office for that consultation. Do not delay; your problems will not go away by ignoring them.