It happened to us on October 14, 2013 when our accountant called and asked us what the hell we had done. We owed the IRS an additional $6,000. Due immediately.
We’d postponed filing our 2012 taxes until the late-filing deadline of October 15, 2012, naively assuming all was well. The only difference between 2012 and 2011 was our marriage, in September of 2011. My husband worked full-time and had taxes deducted from his paycheck. I freelanced, with a variable annual income. He had vastly underestimated how much tax we would owe with our new marital status. Now the IRS wanted its money.
There was no question we owed it. There was no question we intended to pay it. My husband was panicked, but I grew up in a family of freelance creatives, so this sort of thing was pretty familiar to me.
“Payment plan,” I told him. So for the next year—after negotiating with the IRS—we agreed to dig up an additional $500 each month. Dry-cleaning was out. Sack lunches, in. Restaurant dinners, out. Pasta at home with friends, in. We cut an additional $200 a month by downsizing a storage locker and changing our cell phone plan. Welcome to the world of Form 443A (the form used to pay your taxes monthly or through a partial down payment and extended plan, termed an offer in compromise).
And we were the lucky ones; we didn’t have the expenses of children, and at least were able to pare some of our fixed costs while still earning income. Many tax-owing Americans can’t. In 2013 the IRS received 74,000 applications for “offers in compromise,” which allow taxpayers to pay less than they owe. The agency accepted fewer than half—31,000; in 2012, 64,000 taxpayers applied for one and only 24,000 were accepted. In addition, in 2012 the IRS put federal tax liens on 707,768 homes, and 602,005 in 2013.
Bill (not his real name), a 64-year-old former corporate employee in Connecticut, lost his $60,000 job six years ago, and now can only find sporadic and lower-paying part-time work. His wife has a disability and is unable to work, he tells me.
Wishing to flee a poorly maintained rental home, Bill and his wife bought a house in November 2012, withdrawing funds from his Individual Retirement Account (IRA) to do so. “I took out what I thought was sufficient to pay the IRS the penalty for early withdrawal, but I only estimated it at 17%: It was closer to 30%,” he says. “I was way, way off. I’ll be paying this down for the rest of my life.”
Today he owes the federal government $14,000, and $6,000 more in state taxes.
“It’s been terrible,” he says of his experience trying to negotiate with the IRS. “I contacted them right away to set up a payment plan, and we went back and forth for three or four months. I offered them $100 a month, and they wanted twice that. It just didn’t fit into my budget.”
Bill now also has a federal tax lien on his house.
If you can’t pay the taxes you owe the government, you have only two options: negotiate a payment plan or ask the IRS to allow you to pay a reduced amount through an offer in compromise (OIC).
An OIC, explains Patty Burquest, a principal in tax controversy services with D.C. firm McGladrey, “is the most amount of money the IRS can expect to collect from you in the shortest period of time. They don’t like extended payment plans because people default on them.”
A weak US economy since 2008 has “absolutely” boosted the number of uncollectible accounts and OICs, says Foster City, California CPA Robert Caplan. The IRS website reports that 10, 809,000 taxpayers were delinquent in 2012 and 11, 464,000 in 2013,
Caplan warns those who find themselves unable to pay their taxes to beware of unscrupulous attorneys—many of whom advertise their services on satellite radio—who will promise you a better OIC deal. These “OIC mills” lure in desperate and frightened delinquent taxpayers with the false assurance they will negotiate with the IRS for the best deal possible—after collecting a fee for their services. Victims of these mills sometimes discover, years later, that their offer has been rejected and they still owe accumulating penalties and interest, Caplan says.
“Tax professionals know that obtaining an OIC is very difficult to accomplish,” says Caplan. “We think the acceptance rate is under 20%. You must have very little income or ability to generate income and have liabilities higher than your assets.” An illness or disability can help make the case.
Hazel Davis, a former IRS agent for 34 years, who also works at McGladrey LLP as a Manager in their Tax Controversy Services practice (part of its Washington National Tax Office), said in her hometown of Greensboro, North Carolina, these mills often hired former IRS agents who would appear in TV ads. “Taxpayers need to be aware of these scams,” she said. “They make it sound so easy to get an OIC, but it’s not. It’s a very grueling process.”
To request a payment plan, you must offer the IRS a minimum of 20% of what you owe, and the balance within five months or five payments. The longest repayment period it will negotiate is 24 months.
If you apply for an OIC and are rejected, you can appeal the decision, but in the meantime penalties and interest on the amount you owe will accrue. If you are truly unable to pay anything, the IRS will place your file in their uncollectible category–but will revisit it every year or so to determine if your financial circumstances have changed and if you’re now able to pay them something.
The IRS has only 10 years in which to collect the amount you owe, after which it is no longer able to pursue collection of it. “They don’t want that statute to expire,” says Caplan, hence their persistence in chasing down delinquents.
So—where do you dig up the dough? The IRS website suggests “you may consider borrowing from friends and/or family, taking out a loan, or selling assets.” Sell off a piece of property if you can, or borrow against it to pay off the IRS. Some people seek help from their employed adult children.
The best advice these tax veterans offer if you’re facing a 443-A? Find a smart, experienced accountant to walk you through this particular section of hell. Caplan advises hiring a CPA, while Davis suggests selecting an “enrolled agent”— a former IRS official; a list is here.
“Delve into their experience before hiring them,” says Burquest. “How many OICs have they done? Do some research. Are they a member of the American Institute of Chartered Professional Accountants? Be sure to check out their credentials.”