If You’re Able to Pay Your Back Taxes, Don’t Expect the IRS to Give You a Break

Q: I owe the federal government a large amount in back taxes and have entered into a long-term payoff agreement. However, I am interested in learning more about the “offer in compromise” situation you discussed in a recent column. I’ve sent for information from the Internal Revenue Service, but I doubt it will answer the most important question: Just how much money will the IRS accept on such an offer? For example, will it accept a 50% offer? Or an offer for the taxes but not the penalties? Are there any guidelines, or is it simply a matter of “Let’s make a deal”?

I’m thinking that if I can negotiate a settlement for just the taxes, I would be willing to get a loan from my retirement fund to pay the IRS. I figure it’s better to repay the IRS with a loan that gives me back the interest.

--G.J.M.

A: It sounds as though you’re still playing it fairly fast and loose--and that’s not the way the IRS likes to be treated.

Securing an “offer in compromise” with the IRS is not like buying property at a distress sale. The IRS doesn’t have to get rid of your debt at any price; you do. The IRS doesn’t have to make any deal at all.

Quite simply, the IRS believes--and you apparently concur--that you owe the back taxes on which interest and penalty charges are accruing.

An IRS acceptance of an “offer in compromise,” explains David Suss, a Palm Springs certified public accountant, is predicated on the financial condition of the taxpayer and a reasonable assessment of his ability to repay his debt to the government.

Only if the taxpayer is insolvent and has no significant future earning capacity will it take a taxpayer’s offer of significantly less than full repayment. And even then the IRS is likely to hang tough and extract every penny it can. Remember, the IRS is not a warm and fuzzy outfit.

That said, you no doubt already know that the government cannot attach your pension to pay your tax debt. And even if you offer to take out a loan against the pension, you might prepare yourself to be told, “No dice.” Why? Because, Suss says, the IRS might argue that you should liquidate your pension to repay the IRS, not enrich yourself with loan interest charges while the nation awaits the settling of your debt.

“The IRS will negotiate from the strongest position of strength,” Suss says. “After all, if they negotiated from weakness, who would pay their taxes?”

*

Q: I own a vacation home in Las Vegas but maintain a primary residence in California. May I deduct the property taxes I pay in Nevada on my California income taxes?

--F.P.

A: Even though the vacation home in question is outside California, your property tax payments are fully deductible on both state and federal tax returns. If your home in Las Vegas was a rental, your property taxes would be a business expense and would be itemized on Schedule E of the tax forms.

*

Q: I am a college student and would like to enhance my credit rating by taking out a $1,000 loan and repaying it with monthly payments. Would I be a better credit risk when I graduate if I do this?

--J.P.

A: You suggest an interesting and valid scenario. Lenders do, in fact, look for a steady history of prompt repayment of bills when determining what type of credit risk you’ll make.

Typically, experts say, a potential lender would scan a mortgage applicant’s credit report looking for at least 24 months of on-time credit repayment.

One way to achieve your goal without the expense or hassle of getting a cash loan is to string out repayment of your credit card charges for several months, figuring that the extra interest charges you incur are worth the price of building a strong credit report.

However, be advised that when you do not repay your balance in full, interest is not just charged on the outstanding balance alone; rather, once you have an outstanding balance, interest is charged on that amount plus any new charges you put on the card.

So you would be wise to follow this strategy only with a credit card that you do not use regularly.

By the way, this advice applies equally to people seeking to rebuild their credit histories after a bankruptcy, foreclosure or other financial problem. Creditors like to see a steady pattern of repayment, and stretching out a payment schedule can demonstrate that.

But you should not use this strategy as an excuse to pile on credit card charges when you should be paying off that balance.

*

Note: More than one reader called to say that contrary to what appeared here last week, one cannot “purchase flood insurance directly from the National Flood Insurance Program by calling (800) 427-4661.” So why did I write that?

Because that’s what the federal government, which operates the insurance program, says. Really.

The fact is that when you call the toll-free number, you will not be sold insurance on the spot. However, you can get a quote for how much the insurance coverage you need will cost, and you will be referred to an insurance agent who will complete the paperwork.

And that, my readers, is what the government considers direct service.

*

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or e-mail carla.lazzareschi@latimes.com