Tax Debt Settlement With The IRS

Fresh Start

The Fresh Start Initiative has given taxpayers more flexability in dealing with their outstanding tax liabilities. IR2012-53, IR2012-31  

Offer In Compromise   

      Often, especially in this recessional economy, taxpayers find it either difficult or impossible to pay their debts with the IRS. In these situations, it may become prudent for a taxpayer to file an offer (doubt as to collectibility DATC) with the IRS to compromise their tax liability (OIC). What does this mean? You make an offer with the IRS to pay less tax than what is originally owed. This situation is possible when a taxpayer’s standard of living is too low to allow the IRS to collect the tax liability.
     It is important to realize that this procedure with the IRS is entirely discretionary and is based on the “RCP” or reasonable collection potential of each individual taxpayer (True economic Status). See detailed explanation.
     So, what happens if the IRS denies your offer? The Service will keep your TIPRA payment and send you a rejection notice. How long can they take to notify you? Two years. Yes, the law says that if the IRS does not notify you of a rejection within two years, the offer is deemed to be accepted. The catch, you have to make all the contracted payments, just as if the IRS had accepted your offer until you find out through the notification process.

What Happens If Your Offer is Accepted     

     It is possible, if your offer is fairly close to the IRS'S calculated RCP value, they may make you a counter offer (see exhibit). An accepted offer (see exhibit)is just a letter from the IRS notifying you of the offer acceptance and reminding you of the conditions associated with it.
Moreover, offers will be revoked if the taxpayer fails to live up to the conditions of the offer over the next five year period (see exhibit).

Offers and Divorce Can Get Ugly

     Be careful, most taxpayers blow their offers by continuing the bad behavior that got them into this mess with the IRS in the first place. If you get divorced within five years after your offer's acceptance, you may have a mess on your hands and find yourself totally liable for the entire tax debt. The reason, is that if you signed your jointly filed tax return, for the year the original liability was assessed, you are jointly and severally liable for the entire tax debt.
     But, I have a Divorce Settlement? The State Family Court Judge said my spouse is responsible to pay the outstanding tax liability. Sorry, the IRS does not care what the State Court says, if you are jointly liable for the tax debt, they can come after you for the entire amount. Especially if the ex spouse does not have any assets or money. Federal law trumps State law, so be careful not to use that as a bargaining chip in your divorce settlement.

What Happens If Your Offer is Turned Down

     Entering into an installment agreement with the IRS to pay a tax related debt could be a sound option if you do not qualify for an offer in compromise. With this type of agreement, you pay the debt over time, and the IRS is prohibited from levying assets. The IRS, may file a tax lien to protect their interests, but is not required to do so, unless the liability meets certain dollar thresholds. Depending on the amount you owe, you may have to submit a financial disclosure form, Form 433a.

What About Filing For Bankruptcy?

     Yes, you may be able to discharge your tax debts in bankruptcy, as long as the debt has aged 3 years from a timely filed return, 2 years from a late filed return, or 240 days after an assessment of tax after the filing of the return. If you are thinking of filing for bankruptcy protection, there are a few things that you need to understand before you talk to an attorney. First, select a bankruptcy attorney that has a strong background in taxation. Surprisingly, many make major mistakes with the IRS, like listing the dischargeable tax debt as an eighth priority claim instead of on the schedule F with all the other unsecured debts.
      Secondly, don't get mad at the IRS and threaten them over the phone with filing for bankruptcy. Sounds silly? Many people do it and live to regret it. Why, because if the IRS thinks that there is a chance that you are going to file for bankruptcy, they will file a lien on your property the next day. Interestingly, even though your IRS tax liability may end up being discharged by the bankruptcy court, the lien will remain on your house. It remains because the lien is what is called an In Rem action and the bankruptcy only affects In Personam actions. The IRS can then foreclose on the lien and sell your house. Accordingly, once the bankruptcy petition is filed, the IRS is prohibited from filing any liens on your property, so there is a race to file.