Has the IRS come to their senses? Well, a little at least. However, for an agency as powerful as IRS, even some acts of relative rationality are a welcome break from their usual pattern of mindless money extraction.
The big new changes, which occurred just a couple of days ago, are in regard to the Offer in Compromise program. This is a program that appeared to allow financially-strapped taxpayers to work out an equitable resolution of their tax debts, but in reality, only actually worked for very few. The most recent statistics I’ve seen (from about 2010) show that the IRS has recently been rejecting roughly 80% of all Offers submitted. This was done, in large part, due to the anachronistic methods used by IRS to evaluate taxpayers’ financial condition, which usually resulted in them coming up with some ridiculous number as being one’s “reasonable ability to pay”. For example, some unemployed guy who’s broke and underwater on his house submits an Offer to settle $60,000 of tax, and IRS determines that he can “reasonably” pay $50,000, and won’t accept less than $50,000. Since he can’t reasonably come up with $5,000, much less $50,000, the Offer gets rejected.
You might wonder, “how does IRS figure that a guy who’s broke and unemployed with a house that’s underwater can ‘reasonably’ come up with $50K”? That’s because part of the financial evaluation process that the IRS has used looked at not only what they think he has or can come up with now, but also looked at his future collection potential over the next five years or so, based on what he’s made in the past. Since he had a job in the past and made good money, this means to IRS that he will have this same income in the future, and thus could afford to pay $50K over the next five years. But, you might think, he got laid off and his employer went bust. Doesn’t that make a difference? Up to now – no.
You may think this sounds stupid. You may think it sounds mindless. However, there might be more to it……
A Brief History of the Offer in Compromise Program
For many years, the Offer in Compromise program was a little-used backwater of IRS procedure that hardly anyone knew about. Unlike bankruptcy provisions, whose purpose was to take citizens who messed up and got in over their heads financially, pick them up, dust them off and give them a fresh start, the Offer in Compromise program was always intended to allow the IRS to collect more money than they could beat out of you by any other means. Taxpayers had no “rights” under this program; it was simply a plea for mercy sent to IRS combined with a large payment offer. Historically, throwing oneself on the mercy of IRS has not been a successful action.
This started to change in the late 1990s, due in part to hearings held by the Senate Finance Committee, chaired by William Roth of Delaware. These were the famous “jack-booted thugs” hearings, where decades of IRS abuse of their power and of taxpayers were brought forth in all their gory detail. The PR beating the IRS took in these hearings was so terrible that new laws were enacted to give taxpayers actual rights, and IRS resolved to clean up their image and started to promote themselves as the “kinder, gentler” IRS. You may remember those days.
Part of the “kinder, gentler” IRS was to begin to actually be willing to work out long-standing tax debt with financially-strapped taxpayers, as opposed to keeping them on the rack of uncollected taxes for the rest of their lives. It was during this time that the Offer in Compromise program came to life and started to become a reasonable avenue for actually resolving long-starting situations. The program started to actually work.
This went on for a few years, but two factors started to come into play which threatened the future of the program: • Unscrupulous taxpayers and firms started to try to scam the system. You may have seen ads for these sorts of folks on TV or in the media. “Settle your IRS debt for pennies on the dollar” they scream. I hate to be the one to tell you, but some people will lie like crazy to make a few bucks or to resolve a horrible problem. So, there was a distinct upturn in abusive Offers. This did not make a good impression with the folks at IRS. • Certain people at IRS were deeply offended that taxpayers were “getting off the hook” of unpayable tax debt. It didn’t matter that this might be the best thing for these taxpayers or society. Some people at a high managerial level hated the fact that taxpayers were getting out from under their thumb, and used the few abusive Offers which were submitted as “evidence” that the program was rotten, and needed to be “tightened up”. I spoke to some of these folks, and they were determined to effectively shut down the Offer in Compromise program one way or another, even if it took abuses of power to do it.
So – how did they go about ripping the guts out of the Offer in Compromise program? Well, they “tightened up” financial standards for Offers to the point where it was almost impossible to get an Offer approved, all while lobbying Congress to pass new law which forced taxpayers to pay substantial fees and non-refundable tax deposits when they submitted Offers. This combination allowed IRS to be able to reject as much as 90% of all Offers (a few years ago) and collect lots of money while rejecting those Offers. Sounds like the IRS version of Paradise, eh? The long and short of it was that the Offer in Compromise program was there, and offered some hope, but the hope was false and the reality was a dead end for all but a few.
So What’s New and How Might it Affect Me?
Here’s a quote from the new addition to the Internal Revenue Manual (IRS’ policy manual) section which governs how IRS will evaluate taxpayers’ ability to pay: “Note: It is in the government’s best interest to work with this taxpayer to maintain business operations, particularly in a bad economy.”
What? Putting in writing that it’s official IRS policy to work WITH taxpayers to maintain business operations in a bad economy? Wow – that’s a change. And, it’s a sensible change.
There’s been several changes made to how IRS will evaluate a taxpayer’s financial condition for an Offer, all of which have the effect of opening up the Offer program to a much broader group of taxpayers. Many taxpayers can now have some hope that an Offer could actually work for them. The program is still not for everybody; it still works best for those who truly are in hot water financially. But, if you are in hot financial water and have substantial Federal tax debt you can’t afford to pay, it might be time to consider an Offer. This might be the best chance you have for years to get off the rack of unpayable tax debt and get a fresh start on life. In short, there’s real hope, where existed before only false promises.
If you think that these new developments might make some difference to you and your life, contact us. Unlike many, we won’t charge you many thousands of dollars to throw together an Offer, regardless of its viability. We have an inexpensive program which will allow us to evaluate your potential in this new program, and will attempt an Offer only if we think you have a reasonable chance of success.
A new day dawns for some who have been under the suppression of unpayable taxes for too long. This is good news for you, and for all the people of this country.