James A. Demetriou EA
IRS statistics prove the near impossibility of taxpayers using the Offer in Compromise to settle their tax debt for “pennies on the dollar.” It appears the IRS is putting the brakes on the Offer in Compromise program, but this has not stopped the increase of misleading advertising of “pennies on the dollar” tax settlements conjured up by taxpayer advocacy businesses.
The advertisements populate late night TV, attractive suburbanite families grinning ear-to-ear because they paid the IRS only "pennies on the dollar." Examples are given: This family owed $75,000 and paid only $4,600. Another couple owed $225,000 in back taxes and settled an Offer in Compromise (OIC) with the IRS for only $7,512. What these slick commercials do not include are pictures of the other not-so-happy families who shelled out $5,000 or more plus countless hours of effort and energy only to have their Offer in Compromise turned down by the IRS.
When you couple the proliferation of questionable advertising of “pennies on the dollar” settlements with the IRS and the concerted efforts by the IRS to put the brakes on the Offer in Compromise program, you have a consumer fraud alert. IRS statistics show that Offer in Compromise receipts have been consistently decreasing from 74,000 in 2005 to 44,000 in 2008. When you look at the true picture the chances of obtaining an Offer in Compromise are next to impossible. In 2008 the IRS started the year with 8,240,000 unpaid taxpayer accounts and ended the year with 9,232,000 unpaid accounts. (The nine million in unpaid accounts at the end of 2008 represented $94,357,717,000 in unpaid taxes.) However, the most shocking statistic is that of the 8,240,000 tax delinquents at the beginning of 2008, only 11,000 or .001% of them settled their tax debt with an Offer in Compromise. And, those 11,000 taxpayers paid $200,103,000 or about $18,191 each to settle their tax debt for “pennies on the dollar.”
The IRS Taxpayer Advocate’s 2010 Report to Congress stated, “For the past nine years the National Taxpayer Advocate has expressed concern with the effectiveness of the IRS’s OIC program. Most recently, in February 2009, the National Taxpayer Advocate testified before Congress about the IRS’s need to make its collection alternatives more accessible to appropriate taxpayers, and identified OICs as one such viable alternative that has been inexplicably underutilized. IRS data suggests that activity in the OIC program has declined steadily since FY 2003. Further, the number of OICs accepted by the IRS decreased by 72 percent, from 38,643 in FY 2001 to 10,677 in FY 2008. The IRS accepted 34 percent of the OICs submitted in FY 2001, while it accepted only 24 percent of the OICs submitted in FY 2008, despite a recent and significant economic downturn.”
The IRS has ignored the Taxpayer Advocate’s advice for the past nine years and continued its campaign to make Offers in Compromise more difficult. And, it seems to be working in spite of the massive questionable advertising because the number of Offers in Compromise submitted has been dropping rapidly. The requirements for an OIC are stringent and require that a taxpayer has no current or future ability to pay the taxes in full over the next 10 years. If there is property or other assets, any equity increases the size of the Offer. The IRS then looks at income and “allowable” expenses to see if a taxpayer can make future payments on their tax liability. But, most taxpayers are shocked to see how little the IRS “allows” them to live on before they accept an Offer. However, a major problem today is the advertising that implies that most, many or all taxpayers can settle their debt for “pennies on the dollar,” when in reality only .001% per year of all the delinquent taxpayers in America obtain an Offer in Compromise settlement.
Then how do these companies get away with such deceptive advertising? "They don't always get away with it," according to Jim Demetriou, a 16 veteran of IRS Collection Division who is currently an Enrolled Agent and partner at Demetriou, Montano & Assoc. who has been representing taxpayers before the IRS for the last 20 years. "There has been a sudden proliferation in the last couple years of tax settlement companies promising “pennies on the dollar” settlements. They seem to not be aware that several years ago the Attorneys General of 18 states went after J.K. Harris, one of the companies who used to produce these commercials. According to the complaint, J.K. Harris charged up front to assist clients in pursuing an Offer in Compromise without actually determining if consumers qualified for an OIC or even when knowing that consumers, in fact, didn't qualify.
J.K. Harris settled these suits by paying a hefty fine and agreed to stop the illegal and unethical practices.”
The IRS even recognized these ads to be improper and issued this statement way back in 2004:
IR-2004-130, October 25, 2004 - WASHINGTON - The Internal Revenue Service today issued a consumer alert advising taxpayers to beware of promoters' claims that tax debts can be settled for "pennies on the dollar " through the Offer in Compromise Program. Such promoters make money by inappropriately advising indebted taxpayers to file an application for an Offer in Compromise with the IRS, promising unrealistic results, even when the taxpayers do not meet the requirements of the program. This bad advice costs taxpayers money and time... "[The Offer in Compromise] program serves an important purpose. But we do warn taxpayers to watch out for unscrupulous promoters charging excessive fees to taxpayers who have no chance of meeting the program's requirements," said IRS Commissioner Mark W. Everson, "Taxpayers should not be duped by high-priced promises."...
Demetriou also offers hope to folks who have fallen behind on their taxes: "There are many tax consultants who will hear the client's problem at no charge, but a salesman you encounter on the phone knows very little about Offers in Compromise. What is important is to find a local licensed tax representative who has significant experience in dealing with the IRS collection function and who will do a detailed analysis of a taxpayer’s “ability to pay.” Statistics show that an Offer in Compromise is a very detailed and difficult solution to tax problems and requires knowledge, experience and time to fight an uphill battle. We might find that an Offer in Compromise is the appropriate solution, but the truth is, that is the rare occasion. Most of the time our job is to get the IRS to stop the phone calls and garnishments while we negotiate a resolution that a client can understand and afford.”
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Demetriou, Montano, and Associates has been representing individuals and business before the IRS to resolve income and payroll tax problems since 1989. The Southern California firm specializes in resolving delinquent tax cases involving more than $20,000. Most of their clients are referred from tax attorneys, CPAs and Enrolled Agents.