By: A.J. Cook


It's tax time and you have no money to pay your taxes.

Don't panic. If you don't have the money, work out a deal with the Internal Revenue Service. "Work out a deal with them?" are you kidding? you might scoff.

But first, file that return. Failure to file penalties are steep: up to five percent per month of the balance due.

Then consider one of two options. If you can't pay everything now but can pay over time, consider installment payments. If you will never be able to pay the full amount, make an offer.

The IRS allows installment payments from qualified businesses and individuals for up to $25,000 plus interest, payable within five years. To qualify, you provide requested financial information so the agency can determine you can't pay immediately.

Instead of waiting for a deficiency letter, you may request an installment plan when you file your return. Attach Form 9465, (on the Internet at www.irs.gov or call 1-800-Tax-Form). On this Form, list your proposed monthly payment day and amount.

You pay monthly until the debt is satisfied. Like car payments, an installment plan carries fees and interest. The IRS charges a $43 set up fee and interest, currently 8 percent, plus a monthly late payment fee of one-half percent of the balance due.

A car salesman will tell you, the larger the down payment, the smaller the monthly installments and interest charges. The IRS will tell you that too. It will also give this helpful advice. Consider less costly alternatives, such as a bank loan.

If you make payments timely, you keep the car - - and stay out of trouble with the IRS.

The Moral: Troubled taxpayers can drive a deal with the IRS.

The Internal Revenue Service will consider an offer -- on its terms-- to pay less than what you owe.

In earlier years if you didn't pay, the IRS grabbed your assets and garnished your wages-- asking no questions and accepting no excuses. In later years it started considering compromise offers; now it considers personal difficulties. So if you are struggling to pay bills and you fall into one of two groups, try to cut a deal:

1. If payment would cause a severe hardship.
   
2. If you will not have enough to pay taxes after considering assets and future earnings.
   

1. SEVERE HARDSHIP. If taking all your assets would create a severe hardship, the agency will let you keep something. Examples of this exception include the following:

• Your assets are being eaten up because of illness, yours or a dependent's.
  
• You will not be able to pay living expenses if you pay your taxes.
  
• Your advanced age or serious illness from which recovery is unlikely.
  
• Your assets cannot be converted to cash because of circumstances such as an elderly person's inability to obtain a home loan.
  

2. INSUFFICIENT ASSETS. If you don't fit into the hardship category but will never be able to pay the amount owed, and can prove it, the IRS will accept partial payment. Before it accepts an offer, the agency adds up the assets it can sell, like securities you gave to a friend to hide from the IRS, your home and investments in your individual retirement account. Is nothing sacred? Not much. The IRS can't touch tools, some furniture, clothes, personal effects, unemployment benefits and a small amount of weekly wages.

Your offer has a chance of being accepted if it's a reasonable amount. Reasonable is at least as much as the IRS can get by selling nonexempt assets at a distress sale - - plus what the taxpayer will earn in five years after necessary living expenses.

Adding up these amounts will give a rough estimate of the amount expected:

• Your television sold at a garage sale.
  
• The market value of your home equity reduced for a quick sale.
  
• Your Microsoft stock at the stock exchange price.
  
• Your life insurance policy at the loan value.
  
• The present value of the total wages you will earn the next five years less living expenses. Your banker or accountant can figure what the present value of the total is.
  

The rub comes from the fact that you don't now have what you will earn over the next five years. The IRS solution: After you sell what you can, borrow from Uncle Fred. If you don't have an Uncle Fred, pay the balance of your offer in installments.

To start the process, the IRS wants a list of assets, liabilities, income and necessary living expenses. Show this information and your offer on IRS Form 656 (Form 656A is also required for hardship cases.) Read carefully the fine print on the back of the form.

Planning Tip: It's extremely difficult and time consuming to persuade the IRS to agree to a deal. And it's a waste of time and credibility to offer an unrealistically low amount.

Be honest in the information you submit; those IRS people are a skeptical bunch. Agents were working hard to collect $156,000 owed by Ehsanolla Motaghed of Omaha, Neb. Then they heard he died. Not satisfied, they wanted to be sure he was the person in the coffin. They said prove it --exhume the body. The family strongly protested. Finally, the agency backed off. The estate's attorney said the IRS was "just mad because Motaghed had the audacity to die without settling his account."

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

Copyright © 1987-2001 A.J. Cook All Rights Reserved
This information is not intended for use without professional advise.
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Released 3-13-00 and 3-20-00