How do I settle with the IRS on taxes owed? How likely is it they will settle & how much will they settle for?

Question

I just found out I owe $7000 in taxes for last year, due to my income from my [now defunct] partnership being listed as a "Guaranteed Payment" instead of a passive, capital draw (loan from the company). I disagree, but getting the investor/partner to amend the K1 in my favor is unlikely, as poor records were kept and this K1 favors him as far as tax deductions go. And I'm probably not going to be able to fight him.

I've heard the IRS works with people in these cases. I'm 24, unemployed, don't own a house, have $2,000 in credit card debt. I've got about $6,000 cash in hand, but I'm moving next month and half of it'll be gone within 6 weeks. Do you think the IRS will settle with me? And how much, realistically, can I expect the IRS to knock off of that amount? How do I go about negotiating a settlement with the IRS after my return is filed so I don't get penalized. Also, H&R Block wants $408 to do my taxes? Is this excessive? Jackson Hewitt told me they couldn't do it, period. Thanks!

Answer 1

First of all, if you go to www.irs.gov, with your income, you can do your taxes electronically for free - and DON't go to Jackson hewitt, did you see the scam that they are in?

If the IRS settles, which is usually 60%, you will have to claim that as income as a forgiven debt. When you file, you can set up a payment plan and pay all of it (with interest), or write to them requesting a payment plan - and then when you go to your appointment you can discuss getting it settled - honestly, for the few thousand you will save, I would try to go for a payment plan, so it doesn't ruin your credit.

Answer 2

The IRS rejects over 85% of settlement offers and, generally, the IRS will not "settle" if you owe under $10,000. They will tell you to make an installment agreement. They also can take up to two years to decide.

I woundn't know if $408 is high or not. It depends on everything that you have. It is typical for returns with K1s to get pretty expensive....especially this time of year. I have a $700 return pending at my office.

Answer 3

First, you can fight your partner. Form 8082 "Notice of Inconsistent Treatment" is used in this type of case. It is probably something above your ability to do successfully. To get professional help, your best value would come from checking with your state Society of CPA's or EA's (Enrolled Agents) for some local names, and then "shop by phone"

Regarding settling with the IRS for less than payment in full, based on your facts, forget "settling with IRS for pennies on the dollar" as the ads say. This is called an Offer in Compriomise" and you are suggesting that they accept it based on "doubt as to collectibility. If you have a job, they will absolutely not take a penny less because they have 10 years to collect and the power to garnish your wages if you do not pay voluntarily. Also, forget an OIC based on "doubt as to liability" until you have established that you are not liable based on the outcome of the filing of Form 8082.
If all else fails, IRS will allow you to set up an Instalment Arrangement wherein you agree to pay in monthly installments.

Hank Roitman, EA
Sacramento, CA

Answer 4

Try an experienced CPA, instead of trying the form fillers shops. Tax laws are complicated and some one with a few weeks of training can do limited thngs.