Should I file an Offer in Compromise when I am unemployed?
Or why settling back taxes is nothing like settling credit card debt
BY: THOMAS S. GROTH, ESQ (find Thomas on twitter! @tsgESQ)
So, you hear an ad on the radio, the voice is telling you that you can settle your credit card debt for less than what you owe. You think, “I’m unemployed, and I can’t pay, I should be able to get a pretty good deal on my own.” So you call your credit card company and you work out a deal! The bank will settle your debt of $19,566.00 for a one-time payment of $7,500.00! That’s less than 40% of what you owe. Well, who would pass up a deal like that? So you ask family and friends to borrow some money, and you cash out your 401k, and now you have one less thing to worry about once you become gainfully employed again. Success!
Then you start thinking, “I’ve been getting a lot of mail from the IRS, I wonder if I can work something out with them as well.” You’ve done your research, and you are aware that the debt settlement process with the IRS has a funny name, something called an “offer in compromise.” And so, now you’re wondering – “Is IRS Debt like credit card debt? Can I file an Offer in Compromise when I am unemployed?”
Do you want the quick answer or the complete answer? The quick answer is yes, nothing actually prevents you from submitting an offer in compromise when you are unemployed. But should you submit one? Well that’s a bit more complicated. Let me explain.
Tax Debt is not anything like Credit Card debt
Tax debt owed to the federal government isn’t even a third cousin once removed of credit card debt. Back taxes differ in several respects from credit card debt. Here’s a list of 4 significant ways that tax debt is different from credit card debt:
- Tax Debt is secured. A lien exists, by law, as soon as the liability is incurred and can be filed as soon as it is assessed. This means that any property you own at the time the debt is incurred is now subject to the tax debt. Own a classic car, have equity in your home? If you ever sell any of this property, the IRS is going to be standing there with its hand out asking to be paid. On the other hand, credit card debt is unsecured that means in order for a credit card company to get a lien against your property, they need to take you to court. This costs money.
- The IRS does not need to get a court order to garnish your wages, your social security, your unemployment, your disability. Unlike credit card debt, the IRS can simply issue notices to whoever sends you checks on a monthly basis, and those people/companies are required to turn over a portion of your checks to the IRS. The same is true for bank accounts. The IRS can issue a notice to your bank to hand over whatever is left over in your account.
- The IRS has ten years to collect your taxes, but that is ten years after the taxes are assessed. If you don’t file your tax returns, this could mean that the IRS might still have a right to collect on your back taxes from 2002 in 2017! A credit card company will generally have 7 years or less to go to court and file an action against you for unpaid credit card debt. The IRS has 10 years to collect after taxes are assessed. BUT nothing stops the IRS from assessing a tax (filing a tax return for you) 5, 10, 20, 30 YEARS after you failed to file a return on your own. And it is AFTER the IRS does you the favor of filing this return for you that it has 10 years to collect.
- The IRS keeps all collections in-house. The IRS does not sell tax debt to collection agencies for less than the amount you owe. On the other hand, if you stop paying your credit card, the bank will eventually sell off the “bad debt” for a percentage of the total balance. So a lot of times, you are either settling your credit card debt with a bank that is willing to take less for it from a collections agency, or you are settling it with a company that bought it for less than you owe. (A few years ago the IRS did experiment with collections agencies — this experiment was quickly stopped.)
So, why did I mention 1-4 above if all you wanted to know was whether you can submit an Offer in Compromise when you are unemployed? Because I wanted to put the question in the proper context. IRS collections is a a well-oiled, somewhat-unforgiving, cash-extraction machine.
If the IRS thinks that there’s even a moderate chance that you will be gainfully employed again within the next few years, the IRS will wait to collect. Acceptance of an Offer in Compromise is discretionary. And the IRS will only accept an Offer if it thinks that the Offer represents your “reasonable collection potential.” Is it reasonable for the IRS to think that it won’t get a penny more from you if it just waits to strike until you are making money again? Probably not! So, the bottom line is that if you are unemployed, you can submit an offer in compromise. But when calculating your income, don’t expect the IRS to base it on what you’re making on unemployment, but what you’ll likely make once you are fully employed again.
(Of course, a competent tax resolution attorney will find reason, and corroborating evidence, to support conclusion that full employment at previous pay rate is unlikely, hence Reasonable Collection Potential should be downgraded to current income level).
If you are unemployed, there are still solutions to your tax debt
Don’t fret, though. Just because you shouldn’t submit an offer in compromise, there are plenty of other avenues of relief from IRS debt while you are unemployed. You could have your accounts marked “Currently Not Collectable” while you are unemployed to keep the IRS from seizing your savings. You could get into a manageable “Partial Payment Installment Agreement.” Depending on your situation, bankruptcy might even be an option.
If you are unemployed, don’t submit an Offer in Compromise without speaking to a tax professional first. There are probably more viable options out there — or there may be a way to structure your Offer in Compromise so that it can be accepted even though you are currently unemployed.