Should You Try and Settle With the IRS If You're Unemployed?

Alright, I'm giving you a 2fer today since I've been gone so long.

Lois M. of Lovonia, MI asked me a great question: "I just lost my job. Wouldn't this be the perfect time to file an Offer in Compromise with the IRS since my income is $0?"

I love this question because at first blush you'd think Lois was right. I mean, after all, Offers in Compromise are usually based on your ability to prove a Doubt as to Collectibility with the IRS settlement unit. And that Doubt as to Collectibility is based on what you're making in monthly income right now. So it stands to reason, if you're making $0 per month now, won't the IRS settle for $0?

Well, the IRS never settles for $0, but let's put that off to the side for right now. Bottom line is the IRS is on to this line of argument, and the Doubt as to Collectibility that one is to prove is actually a doubt that the IRS will be able to collect the entire debt over the next 4 to 5 years. In other words they are projecting your future monthly disposable income. Although mathematically $0 times 60 months (5 years) equals $0, if you're unemployed the IRS assumes that this is a temporary set back and you will be employed again. Therefore they will either cancel your Offer or they will project future income based on what you were making in your old job.

Well that won't work! Heck, you're not even making that anymore!

My recommendation is to call the IRS ACS Unit at 1-800-829-1040 (or your local Revenue Officer if one is assigned to you) and try to work out a temporary non-collectible status known as a Currently Not Collectible status ("CNC"). This will allow you to pay $0 to the IRS for the next six to 12 months. It will give you a cash flow reprieve until you get a new job and you can figure out if an Offer in Compromise is right for you.

Good luck and take care.