Owe Uncle Sam? IRS may have a deal for you
For some who can't pay entire bill, 'offers in compromise' can clear debt, save millions
A physician from Delevan owed $550,653 in back taxes, interest and penalties, the Internal Revenue Service said earlier this year, but the government settled for $139,308.
A lawyer who is also a Depew village trustee owed the government $247,782, the IRS said, but the feds settled for $38,500.
And the former operator of a temporary staffing company in Amherst owed the government more than $1 million. The IRS settled for $27,444.
Those individuals were among 111 people and businesses who used a little-known IRS program to work out compromises with the nation's tax collector, according to public files at the IRS Buffalo office.
Fewer than 11,000 taxpayers — a minuscule percentage of the nation's tax filers — used the program, called "offers in compromise," in the IRS fiscal year that ended Sept. 30, 2008.
After examining all the program's cases on public file at the IRS Buffalo office, The Buffalo News found 111 taxpayers saved an average of $70,094 by negotiating agreements with the government.
On average, they paid slightly less than 15 cents on the dollar of what they IRS said they owed.
Is the program an easy out for tax delinquents?
Or is it what the IRS says it is — a chance for people who can't pay overdue tax bills to make a new start?
"The goal is to achieve collection of what is potentially collectable, at the earliest possible time and at the least cost to the government," said Dianne Besunder, an IRS spokeswoman.
The agency says it makes such agreements only when it decides collecting the actual tax and penalties would be impossible.
"It's not an easy out. This is not a giveaway program," said Gary Bluestein, a former IRS official who is now an Amherst tax attorney. "Not everyone qualifies. The program is based on economic hardship."
According to Bluestein and his law partner, Deborah J. Muhlbauer, the vast majority of people they have helped to negotiate compromises with the IRS had fallen on economic hard times.
"Most of the people I've dealt with have had divorces, serious illnesses, lost jobs or some other kind of hardship in their family. Some have had problems with addictions," Muhlbauer said. "These are not people who sat down and planned to cheat the IRS."
Businessman's story
Few people are willing to talk about their tax problems, but Albion businessman Keith Coffee, 51, did share some of his story.
A Navy veteran who travels throughout the country to repair machine tools, Coffee got a break from the IRS in August, when the agency allowed him to settle his $183,830 tax bill for $20,000 — about 11 cents on the dollar.
"I wish I had gone to the IRS and worked something out years ago," Coffee said. "Over the years, [the debt] just grew and grew. I feel much better than I have in a long time. This was on my mind for 10 years."
Coffee said he never set out to become a delinquent taxpayer. He said he failed to pay some taxes he owed about 10 years ago because some of the customers who owed him money were slow in paying him.
The original delinquent tax bill was relatively small, Coffee said, without revealing the figure. But over the years, it grew because of penalties and interest, he said, and he didn't know what to do.
"An IRS agent came out to my house a few months ago, and she told me about this program," Coffee said. "I applied, and they accepted my offer. I feel like this has allowed me to make a fresh start. I may even hire a few employees down the road."
The News tried repeatedly to reach the 10 people from Western New York who saved the most money in compromise agreements publicly filed in the Buffalo IRS office. Coffee was the only one willing to comment.
That group included Dr. Richard Castaldo, the Delevan physician; Joseph W. Keefe, the lawyer who is also a Depew village trustee; and Marlene Hamann, the former Amherst businesswoman who saved more than $1 million on her compromise agreement.
Castaldo, through a secretary, declined to comment, and Keefe did not return four calls to his home and office.
According to court records, Hamann formerly ran a temporary staffing company in Amherst. Her company filed for bankruptcy and went out of business in 2002.
The IRS listed a small ranch home on South Park Avenue in Blasdell as Hamann's address. A woman there identified herself as Hamann's sister and said she would get word to Hamann. But Hamann never got back to The News.
The $1 million break the IRS gave Hamann is unusual, but not unheard of, according to tax professionals.
"I've had cases where the amount saved was as high as $5 million," Bluestein said. "But you need to be able to prove that you can only pay a certain amount."
Few taxpayers use the compromise program, and the number has steadily declined, according to IRS records.
At the end of the 2008 fiscal year, when more than 250 million tax returns were filed, more than 9.2 million taxpayers had delinquent IRS accounts.
Of those delinquent taxpayers, only 44,000 — far less than 1 percent — filed for offers in compromise. And the IRS accepted fewer than 11,000 of those offers.
Ability to pay counts
Qualifying for the program is difficult, said Bluestein, who, as an IRS counsel for 14 years, had worked on the other side of the tax system.
Regardless of how much a delinquent taxpayer owes, it all comes down to whether IRS officials believe the person can afford to pay, Bluestein said.
"The IRS follows a very rigid formula," Bluestein said. "They look at your tax bill. Then, they total up all your assets, including bank accounts, investment accounts and the value of your home and property. They look at your monthly income from all sources and subtract standard living expenses.
"After that, the IRS decides if you've got enough assets and income to pay your tax bill."
If the IRS decides an individual cannot pay a tax bill in a reasonable amount of time, it will make a compromise with the taxpayer.
The amount to be paid is based not on what the taxpayer owes, but on what he or she can afford to pay.
In some cases, therefore, a taxpayer who owes $1 million may be allowed to pay less money than a taxpayer who owes $20,000.
To those who pay their full tax bill every year, the program may sound like a bonanza.
But the program has plenty of down sides, according to Bluestein and other tax experts.
For one, a person who makes an offer in compromise to the IRS must pay 20 percent of the offer upfront. If the offer is not accepted, the IRS keeps the 20 percent and applies it toward the individual's tax bill.
If the IRS approves the person's offer, it is placed in a public file for a year. For that year, a person's federal tax information — which is almost always kept in strict secrecy — becomes public record.
Everyone who makes a compromise agreement with the IRS is placed on probation for five years. If, any time within those five years, the person becomes delinquent again, their full tax bill is reinstated, as though the compromise offer was never approved.
And anyone lying about assets or income when applying to the program can be prosecuted for perjury, Bluestein said.
In recent years, a growing number of tax resolution firms have advertised that they can help delinquent taxpayers walk away from their IRS problems "for pennies on the dollar."
Bluestein and the IRS urge caution.
"The radio commercials I've heard make it sound like it's easy for them to walk into the IRS office and settle your case for pennies on the dollar," Bluestein said. "It's not an easy process."
Claims against company
He pointed to a situation last year involving JK Harris, one of the nation's largest tax-relief companies, which agreed to pay $1.5 million in refunds after reaching a settlement with attorneys general in 18 states.
According to the Connecticut attorney general's office, the company "lured vulnerable consumers with false promises" that their IRS debts could be settled for "pennies on the dollar."
In cases where JK Harris could not help the taxpayer, the company "balked" when asked for refunds, Connecticut state attorneys said.
Coffee said that happened to him. He said he paid JK Harris $10,000 three years ago to help him make a deal with the IRS.
"All they did is take my money," he said.
Gina Anton, spokeswoman for the South Carolina-based JK Harris, said the company made no admissions of wrongdoing in its settlement and, for the most part, settled the case only to avoid the cost of litigation.
Asked about Coffee's allegation, she said company records showed that the case was closed after Coffee "failed to respond to our requests."
She described JK Harris as an industry leader that has helped more than 250,000 taxpayers in the past 12 years. The compromise program, she said, has been a "lifesaver" for many of the company's clients.
Nina E. Olson, the federal government's national taxpayer advocate, has repeatedly criticized the IRS for making the compromise program too difficult.
In 2001, the IRS accepted 38,643 offers in compromise, but the numbers dropped off steadily to last year's figure of 10,677 — only 24 percent of those it received.
Earlier this year, Olson asked the IRS to re-examine its policy of requiring most applicants for the program to put 20 percent of their offer up-front as a down payment.
"As a result of the administrative and legislative obstacles that have been erected, I hear regularly from tax practitioners who say they have given up on the offer in compromise program," Olson told a congressional subcommittee in February.
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