The Truth About Getting Rid of Tax Debt

11/30/2017 - By Glenn Scharf, CPA, CVA

If any of you have listened to satellite radio or watch TV, I will assume you have heard those commercials from those specialty tax firms that claim they can settle your debt for “pennies on the dollar.” Is this too good to be true? Probably. Is this as common as those commercials say? Absolutely not.

Can you settle your debt for 10 cents on the dollar? Yes, you can…if you meet the right criteria. In reality, the criteria is very difficult to meet. Unfortunately, it is likely you will not qualify.

My first piece of advice: never pay someone upfront before they understand your entire financial life. This understanding is what it takes to settle your debt. In my 27 years of practice, I have had these cases come up from time to time and was never able to get one approved by the IRS. I tried but was never successful. They just did not qualify. Until recently, I finally had one that was a real possibility, and it was a great one.

I had a client that owed around $210,000 in taxes, penalties and interest to the IRS over a 7-year period. We settled for $8,200. That is just shy of 4 cents on the dollar.

What did it take for this to happen? It is called an Offer in Compromise. In order to do this, you have to report all of your assets including bank accounts, retirement accounts, businesses you own, vehicles and everything else. Also, you must report your monthly income and monthly expenses. If your monthly income exceeds your monthly expenses, then you have a remaining monthly income. They take that remaining income, multiply it out for 7 years, and add the total of all your assets to see if you can pay off the debt. If not, they can look at assets to sell.

What’s the catch? The IRS limits the monthly expenses that you are allowed. For example, if you have a nice house that costs you $2,500 a month for your payment, they are going to say you could rent an apartment for $1,200. They do that with every expense. The limits are based on your family size and where you live.

So basically, my client lost his high paying job and had his house foreclosed on. His wife is a teacher, and they had 3 kids. They had nothing as far as assets (that the IRS would want) and the remaining monthly income was around $120. They clearly did not have enough remaining income to pay off the debt they accumulated, so the IRS accepted the offer.

I ask the question again. Is it possible to settle your tax debt for pennies on the dollar? Yes, but only under very limited circumstances… so pay your taxes.

Regardless of whether you have tax problems or not, you will always want to ensure that you pay the least amount of tax allowed by the law. Our tax professionals will work with you to minimize your taxes and develop plans to pay your taxes in a timely fashion. If you have any questions, email me or contact a member of our Tax Consulting team.

About the Author | Glenn Scharf, CPA, CVA

Glenn is a shareholder in the Tax & Accounting Services Department of Saltmarsh, Cleaveland & Gund and the leads the firm’s Value-Added Tax Service Practice which includes Research & Development Tax Credit analysis and IC-DISCS. Glenn has a broad range of expertise providing taxation, accounting, process engineering, business consulting and tax management solutions services for a number of the firm’s clients including manufacturing, technology, real estate, telecommunications, healthcare, family-owned businesses and individual taxpayers.

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