People normally don’t associate the Internal Revenue Service with the word “accommodating,” but if you owe back taxes, there’s a chance you might find the IRS just that.
Since 1992, the IRS has been conducting an aggressive program, called “Offers in Compromise,” to deal with individuals who owed back taxes, promising to reduce tax obligations for people who clearly didn’t have the ability to pay in full or who had a legitimate dispute about the amount owed.
Taxpayers who want to submit an offer in compromise must fill out a form that they file with a two-page financial statement of their assets, liabilities and income. Whether or not the offer is accepted depends on how close the offer is to the amount owed. If the offer is close enough to the amount owed, the IRS says it may negotiate for a middle figure.
“Some people think of an offer in the Hollywood sense, like `I’ll give you 10 cents on the dollar,’ ” says David Kaye of Kaye, Kotts & Associates. But, he says, the IRS’ minimum standard requires that you give up all your net equity and some portion of your future earnings to qualify.
However, data compiled by the National Taxpayers Union shows that in 1993 the IRS accepted just 14.8 cents on the dollar, down from 26.5 in 1991.
Assuming you get past the first hurdle, an IRS agent will then verify the personal and financial information on your application. The IRS says that most of the time this is done over the phone, through the mail or in a meeting at an IRS office.
But in extreme cases, an agent may make an appointment to meet you in your home. The idea behind that is simple: If you say on the form that you have no salable assets but you have two Rembrandts hanging on the walls, the IRS is going to think twice about the honesty of your offer.
However, some preparers believe the process also tends to jade agents who deal with down-on-their-luck rich folk, who still live in opulent surroundings but have borrowed heavily against their homes and possessions.
Agents are supposed to consider only the taxpayers’ net assets and ability to pay, not their lifestyle. But some IRS insiders acknowledge that it’s hard to separate the two.
What do you do if you think your offer has been unfairly rejected? Appeal. While there’s no assurance that your appeal will be accepted, it is handled by a different group of agents, which would be beneficial if the rejection was based purely on an individual agent’s bias.
One of the problems
And that can be a problem, according to Guy McGaughey, who thought his time had come when the IRS announced its program.
For 20 years he’d been battling over a tax judgment that he maintains he never owed and was always impossible for him to pay. But he says that after he submitted his sixth “offer in compromise,” government agents seized his assets, sued his employer and effectively put him out of business.
McGaughey, 69, who lives in Lawrenceville, Ill., maintains his problem is a personal one. Even though the IRS is serious about its kinder, gentler image, many of its agents still harbor the “them vs. us” mind-set. One longtime bureaucrat trips him up every time, he says.
McGaughey’s case, which involves a 30-year-old debt and some $4 million in taxes and penalties, is unusual. But accountants maintain that the underlying problem is not.
Though national statistics show that the IRS has become far more likely to take an offer in compromise, they also indicate that your chances are much better in some districts than others.
According to data compiled by the National Taxpayers Union, you are far more likely to make a deal in Missouri, where 79 percent of all processed offers were accepted in fiscal 1993, than in Laguna Niguel, Calif., where just 19 percent were accepted. Albany, N.Y. (73 percent) had a much higher acceptance rate than IRS offices in Manhattan and Brooklyn-at 33 percent and 32 percent, respectively. Idaho (77 percent) had a better record than Wyoming (38 percent).
“There is no uniformity,” says Bernard Oster, partner at Cohen, Primiani & Foster in Los Angeles. “The IRS nationally would like to think there is some uniformity in the application of their rules, but the reality is that there is great discretion on the part of the agent.”
Adds Kaye: “It’s the age-old problem of how the IRS differs in administration of its programs from district to district, branch to branch, even manager to manager. When the offers in compromise program came out, we would deal with revenue officers who didn’t even realize that the process had changed.”
IRS explains disparity
The IRS blames the disparities mainly on education and geographic differences between tax preparers and taxpayers.
Some IRS offices have been aggressive about training local tax preparers about what’s required for an acceptable offer, for example. Other IRS offices haven’t taken the time. The result is that some offices get better applications, insiders say. And in some areas, where there are fewer scofflaws and more agents, taxpayers are intimidated enough to give until it hurts. That makes it easier to accept their offers.
The IRS makes every effort to assure that taxpayers in all IRS districts are treated fairly and similarly, says Nancy McCurley, an IRS representative in Los Angeles.
And though there are specific criteria that determine whether an offer is within an acceptable range, she acknowleges that once an initial screening process is completed, some parts of the process are subjective.
