Offer in Compromise
Settling Tax Deficiencies with the IRS

If you owe the IRS tax money and do not have the money to pay the deficiency, there are a few options open to you.

You can negotiate an installment payment agreement with the Internal Revenue Service. Once you enter into an installment payment agreement, you will be expected to pay a certain fixed amount every month on a specified day until the deficiency is paid off. Of course, interest will be added to the amount of your deficiency.

If you fail to make a payment for any reason, the Internal Revenue Service will void the agreement and begin the process of deficiency letters, and liens on your bank accounts, etc. If they put a lien on your bank account, if any funds are deposited into your account they will be withdrawn by the IRS immediately. Similarly, if your business is owed money by its customers, the IRS will garnish these accounts receivable owed to your business so that instead of your customers paying such amounts to you, you business’s customers will be required by law to pay them to the IRS. Obviously, if you agree to an installment payment agreement with the IRS obey its terms scrupulously and to the letter.

Offer In Compromise

Another technique which may be used if a taxpayer does not have enough funds to pay off a tax deficiency is called An Offer In Compromise.

The basic idea here is that if the taxpayer can prove that he cannot pay the deficiency now and it is extremely unlikely that his income or his assets will allow him to pay the deficiency in the future, the IRS may accept an offer from the taxpayers for less than the deficiency owed.

If the taxpayer’s deficiency is $100,000, he could offer the IRS $30,000 in complete settlement of his tax deficiency. The idea behind the Offer In Compromise program is that the IRS is able to collect more revenue than it otherwise could while the taxpayer gets a fresh start.

Some words of caution here.

These are difficult to get. Our firm takes a retainer up front of a few thousand dollars from clients who want us to represent them in these compromise offers. Statistically, recent IRS studies show that more than 80% of these offers in compromises made by taxpayers are rejected. The taxpayer must come up with the money within 90 days or he can elect to pay the offered amount monthly over a period not to exceed 60 months. The Offer in Compromise form is supported by Schedule 433A for individuals and 433B for businesses. These financing statements ask the taxpayer to disclose his income and expenses on a monthly basis and his assets and liabilities or debts owed. The 433A or 433B is turn supported by numerous attachments such as bank and mortgage statements.

A number of years ago we represented a taxpayer who wished to obtain an offer in compromise. The taxpayer had a business and owed IRS payroll taxes which had been withheld from the salaries of his employees. This taxpayer had a substance abuse problem and while he was in rehabilitation his $60,000 tax deficiency, through the magic of tax penalties and compound interest over a 15 year period, became more than $1,000,000.00. We made an offer-in-compromise to the IRS on his behalf for $45,000.00. The agent told me on the telephone when I phoned him a few weeks later unofficially that our offer would be accepted. A few days before the IRS was to officially accept the offer, his superior called us to tell us that he was rejecting our offer-in-compromise since our client owned valuable real estate in Hawaii which he had not disclosed on his 433A to support his offer-in-compromise. The agent informed us that he planned to seize our client’s property and sell it to satisfy his tax deficiency. The agent called back a few weeks later to ask if we were still interested in making the offer-in-compromise at $45,000.00. We told him yes. We learned later from his subordinate that the IRS had seized our client’s Hawaii property and tried to auction it. There were no bidders on the property since prospective purchasers were concerned that the property was very close to an active volcano. So in this case we were able to settle our client’s $1,000,000.00 tax deficiency fro $45,000.00.

When You Need Professional Representation

We advise taxpayers to hire a tax professional to represent them when settling tax deficiencies or making an offer in compromise.  These actions are not for the uninitiated if you expect the best possible outcome.

David Kass is both an experienced tax attorney and a CPA.  Esta Kass has been a practicing CPA since 1977 and is extremely innovative, creative, and ingenious in adopting tax law to the situations in which her clients find themselves.  Please contact Kass & Kass to schedule a consultation. A brief introductory consultation is available for a nominal charge.