What To Do if You Can't Pay Your Taxes -- Part 1

Here is information from Wikipedia concerning the IRS Offer In Compromise Program which lets people settle their past tax debt, sometimes for even less than the amount owed. In future posts, I will discuss other strategies for dealing with the IRS when you can't pay your taxes. I hope that you find it helpful.

The Offer in Compromise (or OIC) program, is an IRS program under 26 USC 7122 which allows qualified individuals with an unpaid taxdebt to negotiate a settled amount that is less than the total owed to clear the debt. A taxpayer uses the checklist in the Form 656, Offer in Compromise, package to determine if the taxpayer is eligible for the offer in compromise program. The objective of the OIC program is to accept a compromise when acceptance is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements.

Qualifying conditions

At least one of three conditions must be met to qualify a taxpayer for consideration of an OIC settlement:
• Doubt as to Liability — Debtor can show reason for doubt that the assessed tax liability is correct
• Doubt as to Collectibility — Debtor can show that the debt is likely uncollectable in full by the IRS under any circumstances
• Effective Tax Administration — Debtor does not contest liability or collectibility but can demonstrate extenuating or special circumstances that the collection of the debt would "create an economic hardship or would be unfair and inequitable." This Offer in Compromise program is mainly for elderly or disabled Taxpayers.

Doubt as to collectibility

Doubt as to collectibility means that the taxpayer will never be able to fully pay the tax bill. The IRS will accept a settlement based on the following formula:
Settlement Amount = 60 months of disposable income + the equity in all the taxpayer's assets. (48 in the case of offers paid within five months of acceptance.)
If a taxpayer believes he or she qualifies, the taxpayer completes a financial statement on a form provided by the Internal Revenue Service. An individual not engaged in business may use Form 433-A, and Form 433-B if engaged in business. These financial statements will allow the taxpayer to outline everything owned, and to create a monthly income and expense table.
Disposable income is monthly income minus monthly expenses. For the example given, assume that disposable income is $100. That amount is multiplied by 48 or 60 months, resulting in a product of $4,800 or $6,000. That is the tentative minimum offer.
Now the taxpayer must add the taxpayer's equity in assets. Assume that the taxpayer owns a house that is worth $200,000 and owes only owe $180,000. In this case the taxpayer has $20,000 in equity. This must also be added to your Offer. (This needs correcting. It should be 80% of value less liabilities.)
The total offer in this simplified situation would be $20,000 + $6,000, or $26,000. What's that you say? You don't owe that much? Then you are not a candidate for the Offer in Compromise program. But if you owe, say, $100,000 then this is a great deal.
However, as is usually the case, things are not this simple. If you can make a cash offer, that is pay what you offer in 90 days or less, than you use a factor of 48, not 60 months as indicated above. Therefore, the minimum amount of your offer based on your income would be $100 time 48, or $4,800.
Let's say that you also convince the IRS that your house could not be sold on the market that quickly or that there are other problems with a potential market sale. Then, you could ask for a discount to "Quick Sale Value," or QSV, instead of Fair Market Value, FMV. Your house in now valued at a discount to 80% of FMV, or $160,000. In the above example. Because your QSV is less than what you owe on the house, and assuming you have no other assets, your actual potentially acceptable offer is $4,800 plus $0, or just $4,800.

Now let's say that you cannot pay the $4,800 within 90 days. You could offer to pay the original $6,000 listed above within 24 months: for example, at the rate of $250 per month for 24 months.

If you cannot even do that, there is yet a third way to pay. You can offer to pay your monthly net income after allowable expenses (as determined by the IRS) over the life of the remaining statute on collection (originally 10 years). Lets say, you can pay $100 per month and there is 7 years (84 months) remaining on the statute. Then you will pay $100 per month for 7 years or $8,400.
If you owe more than $8,400 in tax, penalty and interest, and your offer is accepted, then you have a good deal. If you owe less, its not a good deal; in fact, it will not be an offer that the IRS will accept. You would be better off asking for an installment agreement at $100 a month until your account is satisfied.

Lowest acceptable offer

The above formula may be applicable in cases where you owe a very large sum and you have a significant amount of disposable income. However, "doubt as to collectibility" implies the inability to pay. The IRS has been known to accept offers in compromise as low as 10%, 1%, and $1 (One Dollar), but this is, as you can imagine, very rare.
If your disposable income is $0, you do not expect to have disposable income for some years, you have special circumstances, you have zero assets and if paying this debt would cause a hardship, the IRS has been known to accept ONE DOLLAR to settle your tax liability through the Offer In Compromise. Said provision takes effect 60 days after the signing.

In a recently accepted "Offer in Compromise" filed in 2006, a family experienced the disability of the primary wage-earner. The tax liability was incurred in 1994, and had been accruing interest and penalties (leading to thousands of dollars in tax liability.) The OIC form filed by the family included the required Form 433 Collection Information Statement and expense information (less than the accepted standard expense allowances for OIC formulation), as well as the fee waiver form that is applicable in low-income cases (this waives the otherwise required $150 OIC processing fee.) Because the family's expenses exceeded their income, the disability of the wage-earner and the lack of saleable assets, the IRS accepted their original offer of $1.

Recent tax legislation requires a taxpayer to make a 20% good faith payment with the offer-in-compromise. If the offer is rejected, the IRS can keep the 20% deposit.

Partial payment

Effective July 15, 2006 the IRS made changes to the Offer in Compromise program requiring that an up-front twenty percent, non-refundable payment plus $150 be submitted along with the Offer of Compromise. An Offer submitted without the fees is subject to rejections without appeal. After the IRS receives the Offer, the IRS has two years to make a decision. If the decision is not reached by that time, then the Offer is automatically accepted.

Under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA 2005) if a taxpayer chooses to make payments over time, i.e. monthly, the taxpayer must include with the offer the first month's payment. The taxpayer is not required to submit the 20%, which applies only to the lump sum payment option. Then during the time that the offer is being considered by the IRS, the taxpayer must keep making the monthly payments to keep the offer current. If the taxpayer fails to make the payments, the offer will be returned to the taxpayer.

In the case of both the $150 application fee and either the 20% down payment or the monthly payments, a low income taxpayer may be exempt from both. The taxpayer should review the Form 656A to determine whether these fees and payments apply to them.
Effect of an Offer in Compromise on IRS levy or lien

An Offer in Compromise will have no effect upon a tax lien. The lien will remain in effect until the offer is accepted by the IRS and the full amount of the offer has been paid in full. Once the offered amount has been paid, the taxpayer should request that the IRS remove the lien. An offer in compromise will stop tax levies under section 301.7122(g)(1) of the US Federal Tax Regulations. That regulation states that the IRS will not levy upon a taxpayer's property while a valid offer in compromise is pending and, if rejected, for thirty days after the rejection. If the taxpayer appeals the rejection, the IRS cannot levy while the appeals process is ongoing.

Scams

The IRS issued a consumer alert for consumers to beware of promoters' claims to settle debts for "pennies on the dollar" through the OIC program. The warning addresses companies charging high fees to consumers who may not be eligible for the program; all other payment means would have to be exhausted, including installment payments. A recommendation is to check with the Better Business Bureau before contracting any firm to resolve your tax problems.

ATTORNEY'S ADVICE – 10 Things You Must Do If Your Wallet Is Lost or Stolen

Not A Joke!! If you dislike attorneys..... You will love them for these tips. Read this and make a copy for your files in case you need to refer to it someday. Maybe we should all take some of his advice! A corporate attorney sent the following out to the employees in his company.

1. Do not sign the back of your credit cards. Instead, put 'PHOTO ID REQUIRED.'

2. When you are writing checks to pay on your credit card accounts, DO NOT put the complete account number on the 'For' line. Instead, just put the last four numbers. The credit card company knows the rest of the number, and anyone who might be handling your check as it passes through all the check processing channels won't have access to
it.

3. Put your work phone # on your checks instead of your home phone. If you have a PO Box, use that instead of your home address. If you do not have a PO Box, use your work address. Never have your SS# printed on your checks. (DUH!) You can add it if it is necessary. But if you have It printed, anyone can get it.

4. Place the contents of your wallet on a photocopy machine. Do both sides of each license, credit card, etc. You will know what you had in your wallet and all of the account numbers and phone numbers to call and cancel. Keep the photocopy in a safe place.

I also carry a photocopy of my passport when I travel either here or abroad. We've all heard horror stories about fraud that's committed on us in stealing a Name, address, Social Security number, credit cards.

Unfortunately, I, an attorney, have first hand knowledge because my wallet was stolen last month. Within a week, the thieve( s ) ordered an expensive monthly cell phone package, applied for a VISA credit card, had a credit line approved to buy a Gateway computer, received a PIN number from DMV to change my driving record information online, and more.

But here's some critical information to limit the damage in case this happens to you or someone you know:

5. We have been told we should cancel our credit cards immediately. But the key is having the toll free numbers and your card numbers handy so you know whom to call. Keep those where you can find them.

6. File a police report immediately in the jurisdiction where your credit cards, etc., were stolen. This proves to credit providers you were diligent, and this is a first step toward an investigation (if there ever is one).

But here's what is perhaps most important of all: (I never even thought to do this.)

7. Call the 3 national credit reporting organizations immediately to place a fraud alert on your name and also call the Social Security fraud line number. I had never heard of doing that until advised by a bank that called to tell me an application for credit was made over the internet in my name.

The alert means any company that checks your credit knows your information was stolen, and they have to contact you by phone to authorize new credit.

By the time I was advised to do this, almost two weeks after the theft, all the damage had been done. There are records of all the credit checks initiated by the thieves' purchases, none of which I knew about before placing the alert. Since then, no additional damage has been done, and the thieves threw my wallet away this weekend (someone turned it in). It seems to have stopped them dead in their
tracks.

Now, here are the numbers you always need to contact about your wallet, if it has been stolen:

1.) Equifax: 1-800-525-6285
2.) Experian (formerly TRW): 1-888-397-3742
3.) Trans Union : 1-800-680 7289
4.) Social Security Administration (fraud line):
1-800-269-0271

Of course, an ounce of prevention is worth a pound of cure. Lifelock’s service stops identity thieves in their tracks. It can stop the damage caused by an identity thief before it happens by locking your information so that it cannot be used. Their service is backed by a $1,000,000 guarantee. It costs less than $10 per month. Click here for a free one month trial
.

The Guide to UK Home Ownership

Now, more than ever, your home is the single largest purchase you are likely to make during your lifetime. Taking that first (or second or third) step(s) up the property ladder can be confusing and daunting.

Here is:

THE GUIDE – A quick reference guide to the steps involved in the purchase of your first or subsequent home. It covers everything from budgeting, finding the right mortgage and solicitors, and even exchanging contracts. It is full of simple, easy to follow, advice to ease your first steps onto the property ladder.

Step 1. Are You Financially Ready to Own a Home

Home ownership can be a blessing or a curse. If you have established a proper financial foundation, it can be a springboard for a successful and prosperous future. If not, it can be the first step down the path towards insolvency or bankruptcy. Here are some steps to building your foundation.

Establish an emergency savings account of at least £1000. Remember, unexpected expenses happen. You want to have some reserves set aside so that you will be able to pay those expenses and still be able to pay your other obligations. You also do not want to be forced into paying those expenses using high interest rate credit cards. In the United States, many families were forced into foreclosure and bankruptcy due to the lack of even a modest savings account. Learn from their unfortunate example.

Save 10% of each and every paycheck. As soon as you receive your pay, pay yourself first. Set aside 10% of each check in a separate savings account. Once you have four to six months of income saved you can start saving for your down payment. The reason for having this much money in savings is so that things such as a brief period of unemployment or illness will not force you into foreclosure or bankruptcy. Many families have so little in savings that they are always one or two missed paychecks away from bankruptcy.

After completing the first two steps, start saving for the deposit. Some experts recommend paying anywhere from 10% to 30% of the purchase price as a deposit. By making a higher deposit, you will borrow less money, have a lower monthly payment and will pay less interest. If you don’t make a large deposit, some lenders will charge a “High Lending Charge” which could add as much as £2000 to the cost of buying your new home.

Step 2. Calculating Your Budget

How much can you pay for your home? How much will it really cost you? Set your sights realistically and never borrow more than you can comfortably pay back.

First, work out how much you could afford to pay for your monthly mortgage payment. To help you, here is a monthly budget planner. Simply list your monthly outgoings and subtract it from your monthly income.

Monthly Budget Planner

Income

Your take home pay after taxes £

Spouse / partner’s take home pay after taxes £

Other Regular Income £

Total Monthly Income £

Expenses

Hire purchase / other loan repayments £

Credit Card / store card repayments £

Council tax payments £

Food / clothing £

Gas/ Electricity / Water/ Telephone £

House buildings / contents insurance £

Endowment / life assurance premiums £

Mortgage Payment Protection Insurance £

Travel / car (fuel / maintenance / insurance / tax) £

Savings £

Other £

Total Outgoings £

Amount Available for Mortgage Payments £

Step 3. Other Costs to Remember

When developing your budget, remember there are other costs associated with a home purchase including: Solicitor’s Fees, Land Registry, Valuation / Survey, Searches, Stamp Duty and Home Insurance. These costs could add as much as £4,825 on a £100,000 purchase.

Also, you will no doubt want to make your home, your own. You may want to make repairs, redecorate, paint or even remodel your new home. You may also want to buy new furniture or appliances. Remember to consider these costs as well.

Step 4. Choosing the Right Mortgage

There are many lenders offering many different types of mortgages. Two things to consider are:

How will you pay back your mortgage?

With a repayment mortgage you will pay back interest and a portion of the capital with each monthly payment according to an amortization schedule. After you make the last scheduled payment, you will own your house free and clear of all liens. On an interest only mortgage, you will pay back only the interest portion of the loan. You will need to make provisions to repay the capital.

What type of mortgage best suits your needs?

A fixed mortgage provides you the security of knowing what your monthly payments will be for the duration of the loan, while with a variable rate mortgage you take the risk that your payments will move up and down with changes in the interest rates. A variable rate mortgage may initially offer lower payments in the beginning, but the payments will increase if interest rates increase after the initial period.

What length of mortgage best suits your needs?

Mortgages also come in varying terms such as a 2 year, 3 year, 5 year, 10 year 25 or 30 year term. As the length of the term increases, the payments decrease. However, with a longer term loan, you will pay much more interest over the duration of the loan. How much more? Here is a simple rule called the Rule of 72. It says that to calculate how long an amount of money will double at a given rate of interest, simply divide the interest rate into the number 72.

For example, if you invested £100 at 8% interest, at the end of nine years you would have £200. It works the same way for mortgage payments. Suppose you borrow £100,000 at 8.00%

Loan, Term, & Interest Rate	Monthly Payment	Capital Paid	Interest Paid	Total Paid
£100,000, 10 year term @ 8.00%	£1213	£100,000	£145,594	£245,594
£100,000, 20 year term @ 8.00%	£836	£100,000	£100,746	£200,746

Step 5. Agreement in Principle

Your real estate agent may ask you to provide evidence showing how much money you can borrow. You can do this by getting an agreement in principle with your mortgage lender which is based upon your income, employment status, and the type of property you are looking to buy. It shows that a lender is willing to give you a mortgage and how much you could borrow from them.

Step 6. Making an Offer

Once you have found a property that you want to buy, you need to make an offer to the owners through your real estate agent. Negotiate. Your broker can help you make the right offer. Remember, sellers set their initial price with the expectation that they will have to negotiate downwards. Never offer more than you are willing or able to pay. Also, if the seller won’t negotiate an agreeable price, do not be afraid to walk away. Sooner or later, you will find the right house at the right price.

Step 7. Full Mortgage Application

Once you have found the right property and your offer has been accepted, you need to make your full mortgage application with your lender. The lender will want to see proof of your identity, income, and current address. They will also run credit checks and arrange for a valuation of the property. After they are fully satisfied, they will make a formal offer to you.

Step 8. Finding the Right Solicitor

You will need to hire a Solicitor or Licensed Conveyancer. How do you find one? Word of mouth is a common way to find a solicitor. You may also ask your real estate agent or lender for a referral. Finally, you can search the following websites: www.lawsociety.org.uk or www.conveyancer.org.uk

Step 9. Getting a Survey Done

Your lender will have a valuation performed on the property to ensure that it is worth the asking price.

You should also have a “Home Buyers Report” prepared. That is a detailed inspection of the property to make sure that it is structurally sound and highlight potential maintenance and repair problems of which you might not be aware.

Step 10. Exchanging Contracts

Since your home may be the biggest purchase that you make, it is obvious that the legal paperwork is critical. When you and your solicitor are satisfied, and your mortgage offer is in place, you are ready to exchange contracts. After you sign the contract and pay the deposit, your contract is legally binding. If you then choose to pull out, you may forfeit your deposit. Make sure that you discuss everything with your solicitor, and if you do not understand something then ask.

Remember, you also need to purchase Buildings and Contents Insurance to protect your home and belongings. You also want Mortgage Payment Protection Insurance to pay your mortgage in the event that you become unemployed or unable to work because of illness or disability. Finally, you should consider Life Cover which pays off your home in the event of your death.

Step 11. Moving In

On exchange of contracts, a completion date is agreed. On that date, your solicitor arranges for the money to be transferred and your real estate agent gives you the keys to your new home!

Moving is always stressful; however there are some things you should do to make it as pleasant as possible:

§ Organize a Removals Van

§ Get packed, also label each box with its contents by room

§ Have your post redirected

§ Change the address on your drivers’ license and passport

§ Arrange for the utility meters to be read

§ Cancel direct debits

Enjoy your new home.