"Settle your Tax Debt for Pennies on the Dollar..." You’ve seen it on TV commercials and heard it on the radio. This program is called an Offer in Compromise (OIC). True, you can settle your Tax Debt for less with an Offer in Compromise. But it's not like settling your credit card debts. Settling Credit Card debt is easy, settling Tax Debt is next to impossible. But why?
Offer in Compromise, the Reality: The Offer in Compromise is based strictly on your ability to pay and the IRS’s ability to collect. It is 100% financially driven. What does this mean? If you can pay, the IRS will collect the full amount, not a settlement amount. Period.
Monthly Disposable Income: The IRS has a formula for determining if you qualify for an OIC. How much you have left over after you pay off your bills is your "Monthly Disposable Income," or MDI. MDI is where a lot of you will fall short, here's why:
Your housing/utility costs should not be over the IRS National Standards.What's that mean? Let's say the National Standard for Mortgage/Rent in your area is $1,800, and you're paying a whopping $5,000. The IRS is going to count the difference, $3,200, as monthly disposable income! This means even if you're paying that $3,200 to keep a roof over your head and you only have $1,000 left over every month, the IRS will want you to pay over $3,200 per month to settle your Tax Debt.
But Why!? The IRS doesn't want you paying so much for housing that you neglect your tax obligations. And they certainly don't want to encourage taxpayers to raise their housing costs to lower their MDI and reduce tax payments. The IRS can't reward this type of behavior.
And Finally... IRS employees really don't want to settle your tax debt! They pay their taxes on time every year (or they'd be fired) so why shouldn't you?
What can I do? The odds are stacked against you. Before you consider submitting an Offer, make sure you even qualify. And if you qualify, consider working with a professional.