As many know, there are three possible settlement options to people facing tax problems. The options generally are driven by your ability to pay the IRS for the back taxes you owe them. Although the amount of tax plays a role in complicating the tax problem, it is not the driving factor for tax resolution.
Types of Tax Resolution
The first, and the most well-known tax resolution program, is the installment agreement. Under this arrangement you pay everything you owe the IRS and then some. You pay the whole tax debt plus penalty and interest. Obviously this does not sound like the best tax settlement option. But sometimes it is the only option and it is not even without difficulty especially for higher income taxpayers. For them a reasonable installment agreement is all they hope for. And for them it may even mean going through hoops to get to this objective.
The lesser known option is the currently not collectible option. It is usually reserved for people whose financial situation is not as good. Specifically their cash flow precludes them from paying their tax debt but they usually cannot benefit from an offer in compromise.
The third option is the offer in compromise. This option is viewed by many as the best tax settlement you can obtain. In this option you consider both your cash flow and the assets. Basically if your expenses do not allow you to fully pay your tax debt considering your earnings, and taking into consideration your net worth, you have a chance to win an offer in compromise.
Difference Between an Installment
Agreement & Offer in Compromise
In this regard the lower the income and the fewer assets you have, the better your chance of submitting a successful offer in compromise. Introducing the automobile which is an asset we will appear to contradict this principle of less being better.
To make my point let us assume that we have no equity in the automobile. In this case we are only dealing with the benefit of the automobile payment in negotiating an IRS tax resolution. The automobile payment (even a paid for automobile under Fresh Start IRS program) will allow the deduction of expenses up to about four hundred dollars from your monthly income. Not only you get to deduct an auto payment but you are eligible to deduct a good amount of operating expense (close to three hundred dollars).
Contrast that with the fact that without car ownership, you are entitled to only a little less than two hundred dollars per month. So there may be five or even six hundred dollars that you need to put on the table for your offer in compromise. Over a two year period it may mean about fifteen thousand dollars that you did not have to pay if you had an automobile.
(Editor’s note: Dean Alexander is the CEO of NFA Tax Help and has been helping clients with tax issues for over 35 years. More information is available at www.resolvemytaxes.com.)