How to Negotiate With the IRS

SAN FRANCISCO – Negotiating with the IRS has never been easy, but lately it's gotten even harder. As the agency increasingly focuses on collection, tax practitioners say, options that allow taxpayers to write off or substantially pare their tax bill have become a harder row to hoe.

That makes those sales pitches promising you'll pay "pennies on the dollar" of your tax bill questionable at best. But taxpayers with a legitimate hardship, and who can prove their willingness to work with tax collectors, still have a legitimate shot at winning some reprieve under the IRS "offer in compromise" program or by agreeing to an installment payment plan.

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Because of tax-law changes that went into effect last year, some taxpayers who might have legitimately claimed a break under the offer-in-compromise program in the past likely won't be able to anymore, tax experts said.

The main reason: A 20 percent up-front payment of the lump sum settlement you promise to pay. That may be a substantial barrier to applying for the program for taxpayers who are struggling to pay anything at all. Plus, the deposit is nonrefundable if your offer is rejected by the IRS.

Also, some tax practitioners note that it's simply harder to get IRS approval these days.

Over the past 10 years, about 90 percent of his offer-in-compromise applications on behalf of clients were approved by the IRS, said David Levine, an enrolled agent with D.M.L. Consulting in Reno, Nev. But his approval rate has declined to about 70 percent in recent months, he said. Enrolled agents are tax preparers who are authorized to represent taxpayers to the IRS.

"I wouldn't make an offer if I didn't think it would be approved. Now, I'm down in the 70 percent bracket and I'm using the same diligence," he said.

Some note that plenty of taxpayers misunderstand the offer-in-compromise program, thanks in part to advertisements promising to wipe out tax bills.

"People need to know that an offer in compromise is not a magic key to make their taxes go away, if they have the assets or the ability to work to pay" their bill, said Jayme Gallenson, an enrolled agent with H&R Block in Corte Madera, Calif.

"I've had doctors walk in with millions of dollars of assets in real estate who want an offer in compromise because they're having a bad year. I have to explain to them, 'No way,'" Gallenson said.

Still, some low-income taxpayers who meet certain income limits can apply to waive the 20 percent down payment plus the $150 application fee. Often, that taxpayer is facing severe economic hardship, perhaps because a medical condition makes it impossible to work, Gallenson said.

Easier installment plans

Luckily for taxpayers not in that situation, the requirements for the IRS' installment program are a bit easier to meet these days.

"The IRS would at one time not accept an installment agreement unless over the life of that agreement the taxpayer was going to be fully paid" on a tax bill, said Frank Degen, an enrolled agent in Long Island, N.Y.

"When they changed some of the legislation, they now accept partial-payment installment agreements, the notion being that if the taxpayer is down on their luck and can afford to pay $100 a month, it's better to get the $100 a month than to get nothing."

If you owe less than $25,000 and can pay the full amount over time, the IRS routinely accepts such installment agreements, Gallenson said.

If you're asking to pay less than the full amount you owe, then the IRS may request information about the current state of your finances, he said, via a Form 433A. "Usually, if you're going to pay less than the amount, they're going to ask for financial disclosures of your personal situation," Gallenson said.

The IRS will also want to see that form if you request an installment agreement on a tax bill of more than $25,000, he said.

Of course, installment payments aren't exactly free. "Interest and penalties always keep going. The penalties stop at 25 percent of the tax liability, but interest always keeps running and the interest can be quite substantial. There's no free ride," Degen said.

Professional help a plus

Taxpayers with a large tax bill that they cannot pay may want to consider hiring a professional tax preparer.

"For the average taxpayer, trying to get through to the IRS sometimes can be a daunting task," Gallenson said. Professionals have access to "practitioner hotlines where we can get through almost immediately to someone who can bring up the taxpayer's account and with whom we can discuss the opportunities," he said.

"We know the shortcuts and we know how to use them. There are many times clients have been very frustrated, [but then] they sit down at my desk, I make a call and get it resolved while they're sitting there," he said.

No matter what your ability to pay is, it's important to file on time, as the failure-to-file penalty is 4.5 percent per month, while the failure-to-pay penalty is 0.5 percent per month. That is, if you don't file, you'll pay 5 percent per month, plus interest. If you file, but fail to pay, you'll pay 0.5 percent per month, plus interest.

Also, tax practitioners say that if you can't pay, the best thing is to notify the IRS right away. If you owe less than $10,000 and start making payments right away, there's a good chance the IRS will accept your installment agreement terms.

Click here to visit FOXBusiness.com's Tax Planning page.