Can Roni Deutch Settle with the California AG for “Pennies on the Dollar?”

The California AG filed a complaint this week against Roni Deutch, AKA the “tax lady.”  The complaint claims that the Law Office of Roni Deutch, which offers tax relief with a claim that clients can settle for “Pennies on the dollar!  Pennies on the dollar!”  The complaint seeks an injunction and $34 Million in restitution alleging unfair business practices including misleading advertising claims.

One of the main vehicles tax relief companies claim to use is the Offer in Compromise process.  In 2008 44,000 offers in compromise were submitted to the Internal Revenue Service and only 11,000 were accepted.  That’s a success rate of 25%.  You wouldn’t know this from the claims of many tax resolution services, who often claim success rates of 80% to 90%.  The California AG issued a press release which outlines some of the claims against the Law Office of Roni Deutch and states that her sales staff were making claims of a success rate of 99%, when their actual success rate was 10%.  The press release also alleges that some of the clients who provided testimonials in her television ads still owed the full amount of their IRS assessments.

Offers in Compromise can be a successful way of dealing with federal tax liabilities, but only in certain specific instances.  The Offer in Compromise comes in three flavors, a Doubt as to Liability Offer, a Doubt as to Collectibility Offer, and an Effective Tax Administration Offer.  Doubt as to Liability Offers are rare, as there are usually less cumbersome ways of dealing with this type of claim.  Usually these center on a dispute with the IRS over the interpretation of a Tax Code provision.   An Effective Tax Administration Offer is essentially a claim that while the tax assessment is valid, it would be damaging to public policy to collect on it.  The approval rate on these types of offers are extremely small.  By far the most common offer is the Doubt as to Collectibility, that is the assessment is valid, but the tax payer does not have the assets or income to satisfy their obligation.

Most Doubt as to Collectibility Offers are cash offers, that is you offer to pay a settlement amount within 5 months of acceptance.  The formula for determining what to offer is based upon the taxpayers income and assets.  The IRS will take the disposable income of the taxpayer for 48 months.  Disposable income is determined by taking the tax payer’s income and deducting expenses according to schedules published by a variety of sources.   For instance, a taxpayer in La Crosse could deduct a housing and utility cost of $1,485 for a family of four, whether they pay $800 or $2000 for rent.

The next consideration is the equity in assets of taxpayer, basically any property that taxpayer owns which can be sold for cash that the IRS could lien and sell to satisfy the tax obligation.  The Formula for the Offer in Compromise is (disposable monthly income x 48 months) + (equity in assets) = OIC cash offer amount.

There are some variations on the cash offer.  One is a short-term deferred offer which is made in 24 monthly payments.  This changes the equation by adding 12 more months of disposable income to the formula.   The other option is the long-term deferred offer which spreads that payments out over the remaining statute of limitations period for the debt.  The statute of limitations to collect is 10 years, but many things can toll, or extend the statute, including the application for the Offer in Compromise.  Because the payment period so long for long-term deferred offers they typically do not offer a large amount of savings to the taxpayer.

Offers in Compromise can be a powerful tool for tax relief in certain situations, but determining whether it’s the right option requires an analysis of the taxpayer’s particular situation.  Be wary of any tax resolution services which claim the Offer in Compromise is a panacea for all tax issues, especially if they suggest it as an option before they examine your particular circumstances.  It is much more likely that if you legitimately owe the tax and have sufficient assets an income that the issue will be resolved with an installment plan for the full amount.

If the California Attorney General’s allegations are true, I feel for the consumers who were obviously already in trouble if they could not pay their tax obligations.  If there is a silver lining to this story, it’s that I may look forward to a day when I can watch T.V. in bed and not be startled by the excessively loud promise of settling an IRS debt for pennies on the dollar.

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