It is not uncommon for taxpayers to contact us and tell us that they want to apply for “that program” where they can settle their debt for a fraction of what they owe. They will often tell us that they saw some ad, web site, or a salesmen told them that they could settle their tax debt for some fixed percentage or a fraction of what they owe. However, this is blatantly incorrect. There is no (absolutely no) provision in the tax code for allowing a taxpayer to pay some set percentage of their tax liability and just calling it good. It has never existed, and most likely never will.
So what exactly does “pennies on the dollar” refer to? It is a reference to the IRS Offer in Compromise (OIC) program, which allows eligible tax debtors to pay the IRS an amount of money that is less than what they owe in order to wipe out their entire tax liability.
The phrase “pennies on the dollar” was actually determined several years ago by the IRS to be a form of deceptive advertising, and they explicitly instruct licensed practitioners that the use of this phrase is a violation of Circular 230, which is the practitioner behavior handbook for working with the IRS. However, since the IRS doesn’t have jurisdiction over firms that just market these services, it comes into the FTC’s purview to look out for these deceptive marketing practices.
In advertising, you’ll hear companies talk about settling for 20%, 10%, or even less. These ads, and the sales people you talk to on the phone, are trying to sell you an OIC service package. Many of their web sites even have little interactive calculators where you type in how much you owe the IRS, and it’ll spit out a, “You may only have to pay $xxx” message.
Instead, the amount of your OIC settlement is calculated using a very, very strict formula… and that formula is NOT secret — it’s available on a worksheet in IRS publication 656B.
Based on this formula, if you have equity in assets that exceeds your tax debt, you simply don’t qualify. Period. End of story. For most individuals, the common thing is going to be equity in your house or rental properties, or perhaps equity in a collection of classic cars, stamps, coins, guns, art, etc. If the value of ANY of that stuff is greater than your tax debt, you do not qualify for the OIC program – there is no way around this.
In the same vein, if you are a high income earner, it’s also highly unlikely you will qualify for the OIC program. The reason for this is that the IRS only allows certain amounts of money every month as “eligible expenses” for housing, cars, food, etc. If your lifestyle exceeds these amounts, the IRS doesn’t care — they will only allow you to claim the National Standard expenses. Any monthly income over those amounts gets multiplied by either 12 or 24, and THAT number goes into your offer amount.
In these circumstances, you may qualify for a period of up to 12 months to make a “lifestyle adjustment,” and reduce your living expenses to come into line with IRS standards. This will often involve selling luxury homes and getting rid of toys such as cars and boats. Keep in mind that these items are all covered by your tax lien, so any proceeds from the sale of these items technically is owned by the IRS, and should be paid over to them. A good tax representative can assist you with structuring these sales so that both you and the IRS get something out of it.
Beware of anybody promising that your tax debt can be settled for some fixed percentage of the debt. That’s not the way it works, and never has. Anybody trying to sell you on that idea is OUTRIGHT LYING TO YOU, and you should seek assistance elsewhere.
Do you need help with a back tax matter? Visit our Got IRS Debt page and enter your information in the box on the left for a FREE 30 minute Tax Debt Settlement Analysis. This analysis, valued at $197, will look at your situation and tell you what IRS programs you qualify for to settle your IRS headaches once and for all. Alternatively, you can simply call us at the number in the upper right portion of this page and we’d be happy to schedule an appointment time for you.