What exactly does “pennies on the dollar” refer to?
It’s a reference to the IRS Offer in Compromise program, which allows eligible tax debtors to pay the IRS an amount of money that is less than what they owe in order to wipe out their entire tax liability.
In advertising, you’ll hear companies talk about settling for 20%, 10%, or even less. These ads, and the sales people you talk to on the phone, are trying to sell you an Offer in Compromise service package. Many of their web sites even have little interactive calculators where you type in how much you owe the IRS, and it’ll spit out a, “You may only have to pay $xxx” message.
The phrase “pennies on the dollar” was actually determined several years ago by the IRS to be a form of deceptive advertising, and they explicitly instruct licensed practitioners that the use of this phrase is a violation of Circular 230, which is the practitioner behavior handbook for working with the IRS. However, since the IRS doesn’t have jurisdiction over firms that “just market” these services, it comes into the Federal Trade Commission’s purview to look out for these deceptive marketing practices.
Some ads, websites, and salesmen are out there trying to convince taxpayers that what you settle for is some fixed percentage of your tax debt. However, this is blatantly incorrect. There is absolutely no provision in the tax code for allowing a taxpayer to pay some set percentage of their tax liability and just calling it good. It has never existed, and most likely never will.
Instead, the amount of your Offer in Compromise settlement is calculated using a very, very strict formula…And the formula is NOT secret — it’s available on a worksheet in IRS publication 656B.
Based on this formula, if you have equity in assets that is greater than your tax debt, you simply don’t qualify. Period. End of story. For most individuals, the common thing is going to be equity in your home or rental properties, or perhaps equity in a collection of classic cars, stamps, coins, guns, art, etc. If the value of ANY of that stuff is greater than your tax debt, you do not qualify for the Offer program and cannot settle for “pennies on the dollar” – there is no way around this.
In the same vein, if you are a high income earner, it’s also highly unlikely you will qualify for the Offer program in general. The reason for this is that the IRS only allows certain amounts of money every month as “eligible expenses” for housing, cars, food, etc. If your lifestyle exceeds these amounts, the IRS doesn’t care — they will only allow you to claim the National Standard expenses. Any monthly income over those amounts gets multiplied by either 12 or 24, and THAT number goes into your offer amount.
In these circumstances, you may qualify for a period of up to 12 months to make a “lifestyle adjustment”, and reduce your living expenses to come into line with IRS standards. This will often involve selling luxury homes and getting rid of toys such as cars and boats. Keep in mind that these items are all covered by your tax lien, so any proceeds from the sale of these items technically is owned by the IRS, and should be paid over to them. A good tax representative can assist you with structuring these sales so that both you and the IRS get something out of it.
Beware of anybody promising that your tax debt can be settled for some fixed percentage of the debt. That’s not the way it works, and never has. Anybody trying to sell you on that idea is selling you swampland in Florida, and you should run from them and seek assistance elsewhere.