"Bottoming Out"

by Greg Mermel, C.P.A.

Published in the "Money and Taxes" column in PerformInk on September 26, 2008

Current American political discourse about the economy seems to resemble six-year-olds at the playground, with two principal differences. When the children yelp "Is so!" "Is NOT!!" "Is IS IS SO!!!," they are considering whether Susie has cooties. For politicians and pundits, the issue is whether we are in a recession.

Unlike the children, these alleged adults have facts (or claim to have facts) which support their contradictory positions. Some, like the Index of Leading Economic Indicators and the Producer Price Index, are based on verifiable data. Others are more in the nature of pseudo-science, often using biased analysis of deliberately incomplete data.

You can also glean useful if unscientific information about the health of the economy just from observing changes in people's behavior.

Lately I have been seeing different flavors of spam. Not the meat product, which Hormel still refuses to make in pecan-wasabi or low-sodium versions. I mean the junk arriving on your computer.

What's In Your In-Box?

My email address is widely available, so I receive about sixty spams a week. The mixture of subjects has noticeably changed as the economy has soured.

Some are perennials: Nigerian officials with large sums of money, penis enlargement, fake eBay disputes, and bogus alerts about fraudulent bank or Paypal activity.

Two years ago, I was seeing a river of offers for fake Rolexes, bargain software, "as advertised on television" products and secret ways to improve your golf game. All of these were aimed at people with money to spend and upward aspirations. That stream is now a mere trickle.

Their replacements target those in financial straits. Some purport to help you get money: "work at home," "guaranteed loan approval," "get government grants!" and "secret job listings."

Others target those mired in debt. I've seen lots of "stop foreclosure" recently; no surprise there. "Fix your credit" and "get rid of credit card debt" are on a distinct upswing.

And rising fast: "erase your tax debt!"

Not Happening That Way

I haven't actually contacted any of the spammers who claim they can end tax debt, but there are several typical schemes.

One is to collect a fee from you and then do absolutely nothing. They might even have the chutzpah to string you along, expressing disappointment when nothing changes and recommending they take further action -- for, of course, an additional fee.

Another is to sell you a do-it-yourself kit or a book about how to get rid of tax debt, so it becomes your fault when the (nonsense) advice does not work.

More sophisticated schemers might claim to actually be working through IRS channels, gather all the data that would legitimately be needed for that, and then use that information for identity theft.

They all work about as well as the penis enlargement products (though I can't say I have checked them out, either).

Doing It Right

Actually, the IRS will sometimes settle back taxes for less than the full amount. They have to be approached properly, the facts of your situation have to fit certain guidelines, and -- though they would never say so -- you need to be a bit lucky about which IRS employee reviews your application and when you submit it.

Under the Offer in Compromise program (as it is officially called), the IRS will consider settling under three circumstances. The first is unresolved doubt as to your actual liability for taxes, which is really used only as a way of settling disputes without litigation.

The other two situations involve people who cannot pay.

The more common one is "Doubt as to Collectibility," which the IRS accurately and succinctly characterizes on the application as "I have insufficient assets and income to pay the full amount."

The other, "Effective Tax Administration" gets a longer paraphrase: "I owe this amount and have sufficient assets to pay the full amount, but due to my exceptional circumstances requiring full payment would cause an economic hardship or be unfair and inequitable." The IRS offers no guidelines as to what those "exceptional circumstances" might be, but I am sure they are exceedingly rare: perhaps a disabled person with assets but no income, or a business that would be forced to close.

An acceptable offer would be based on what the IRS calls (perhaps ironically) your Reasonable Collection Potential. This is the sum of two figures. The first is, more or less, everything you have: the value of all your assets (with modest exceptions) minus the debts secured by assets (that is, car loans or mortgages, but not credit cards).

The other component involves how much you could pay monthly over either 48 or 60 months, depending on how quickly you propose paying the reduced amount. This calculation assumes they get everything left after basic living expenses. Emphasis on "basic."

Will It Fly?

These formulas are guidelines, and the IRS is not bound by them. The examiner's approval or rejection will be based on his judgment as much as the contents of the application and thick stack of supporting documents.

Approval or disapproval also has a bipolar political aspect. Periodically, Congress beats up the IRS for not more vigorous in chasing tax deadbeats. When that happens, getting an Offer in Compromise approved becomes nearly impossible for a while. Then, some other Congressional committee will decide the IRS is being too harsh on people down on their luck, and bring up a parade of sobbing Jean-Valjean-like witnesses. Offers sail through, till the pendulum swings back.

The Offer in Compromise program is intended for genuine hardship cases only. They deliberately make the process difficult, and charge an application fee, to weed out those just looking for a way to avoid paying or stalling for time.

But for those in a truly impossible situation, the only other alternative is moving to one of the few countries where the U.S. has no extradition treaty, and never come home again.

Free Offer

Every year during the income tax season, I offer free copies of my “Checklist of Potential Deductions...” for those in the arts. Just call my office, or send an email to checklist@gregmermel.com.

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