New Law For Tax Debt Settlement

There was a new law passed in 2005 that will effect taxpayers who are under an IRS wage garnishment. Rather than help improve financial situations for taxpayers, this new law will make solving tax problems with the IRS more difficult.

In recent decades, the IRS has made a focused effort to get people back into good status by reaching deals on overdue taxes. With the passage of this new law, it seems taxpayers who are behind on their taxes will have a more difficult time getting the matter resolved with the IRS.

A few decades ago, the IRS used to be the terror in most peoples nightmares. Specifically, people who had unpaid income taxes lived in dread of having the IRS catch up with them and freeze their bank account, garnish their wages, or worse, evict them from their residence and sell off their home. To promote voluntary resolutions, whereby the IRS would collect money and the taxpayer could get a tax problem resolved, the IRS instituted a program known as the offer in compromise.

The offer in compromise program was designed to let taxpayers with back tax problems cure their situation voluntarily. Instead of waiting for the IRS to catch up to them, taxpayers could come forward and actually negotiate with the IRS. In exchange for this voluntary action, the IRS would consider a reduction of the amount past due including penalties and interest. To be honest, the program was a massive success.

Effective July 16, 2006, the offer in compromise program has undergone changes pursuant to a new federal law. Ironically, the small government Republican majority in Congress pushed through a foolhardy piece of legislation known as the Tax Increase Prevention and Reconciliation Act of 2005. The legislation mandates very specific changes to the offer in compromise program.

The most dramatic change is the new 20 percent rule. Pursuant to the new legislation, a taxpayer that has problems with past due taxes must send in 20 percent of the offer amount with their offer in compromise. This money is not refundable. Nor will the IRS even acknowledge an offer in compromise if the funds are not submitted. The logic behind this legislation is baffling to many. This 20 percent "fee", if you will, does not guarantee that your offer will be accepted. In fact, the IRS can keep the 20%, reject your offer, and apply the amount to the back taxes that are allegedly owed. A reasonable person can see that these terms do not encourage taxpayers to get right with the IRS.

When a taxpayer gets behind on tax payments, he almost always gets way behind. It is rare to find someone who is only one year in arrears. It is likely that most people who miss paying taxes one year take the head in the sand approach. Fearing all kinds of trouble, they just ignore the situation. When the next year rolls around, they don't file again because they are worried about alerting the IRS. As a result, the amount of taxes due grows rapidly each year, particularly when penalties and interest are added. The 20 percent requirement seems to serve no purpose other than to give people another reason to ignore the problem.

The offer in compromise was originally designed to get people back into the system, so that they could begin to pay taxes again. Studies and statistics showed that the government would collect far more in revenues over the years if taxpayers were given a clean start. For all practical purposes, the new 20 percent rule conflicts with this purpose and hurts this program. Taxpayers who are under an IRS wage garnishment are already suffering from reduced income. It will be much more difficult for them to reach a solution because they presumably won't have the 20 percent to even make an offer to settle with the IRS.

It would be wise to write your Senators and Representatives in Congress if you don't approve of this new law.