Businesses that extend credit to their customers know that some bills will never be fully paid. Some customers are fundamentally honest and perfectly willing to pay, but unexpectedly do not have the money when the bill comes due. Others are less honest, and simply won't pay even though they can.

Some of the 'can't pay' group were unrealistic in their expectations, but many have simply seen their lives unravel: unemployment, divorce, illness. Of the 'won't pay' group, only a small part are deliberate thieves. Most somehow rationalize their behavior on the grounds that the product was overpriced, or a big company owes something to its customers, or that because they are able negotiators, they should get a better price. A practical approach to collection requires knowing which customers are in each group. Businesses will generally settle with the 'can't pay' ones (even for zero), if only because doing anything else is futile. But the 'won't pay' group requires a decision for which the likely anger and sense of feeling cheated must be set aside for a cool analysis: How much can you collect at what cost of both time and money? 'A good settlement is better than a bad victory in court,' says a lawyer with whom I often work.

When the unpaid bills are taxes, the decisions involve additional factors. A business can choose its customers and decide to whom credit should be offered. The Internal Revenue Service (IRS) and the Illinois Department of Revenue have no discretion in the matter and, indeed, do not even know to whom they are extending credit until that tax return is submitted showing a balance due. When a businessman makes a decision to settle, or to sue, or to write off a debt, only his banker is potentially in a position to question that choice. Tax collectors, however, are likely to be second-guessed not only by the legislative bodies that appropriate their funds, but individual members of those bodies, the press, voters, radio call-in show hosts, and authors of books pushing crackpot legal theories. Many of these critics have agendas that gain little if tax collection is fair, reasonable and effective and that gain much if tax collection is seen as bumbling or heavy-handed or soft-hearted or biased for/against some favored/unfavored group. Tax authorities, therefore, tend to be extraordinarily cautious when it comes to negotiating settlements.

The State of Affairs

The Illinois Department of Revenue has had for more than 30 years, a program comparable to the IRS's offer in compromise program, but it is not very useful. Unlike the federal program, the Illinois program has no published guidelines or rules, and they will not negotiate. Any request is heard by a politically appointed Board of Appeals, which is not bound by precedent and does not state its reasons. Most practitioners regard it as a waste of time unless large sums of money are involved'that is, when the cost of hiring well-connected lawyers can be justified.

The State of Illinois badly needs money right now. A retail business in similar distress might run a huge sale, heavily discounting its merchandise to raise money. And that is exactly what the Illinois Department of Revenue is doing: they are offering a clearance sale on back taxes, only they call it a Tax Amnesty program. Pay your eligible back taxes paid Oct. 1 and Nov. 17, 2003, and all penalties and interest are forgiven. Wait until Nov. 18, and the penalties and interest double.

To be eligible, taxes must be for the years 1984 through 2001, and you must have filed a return for those taxes by the end of the amnesty period. So, all of you who haven't filed those old tax returns, get to work now. November 17 is only nine weeks off, and this is a one-time-only program.

About those Federal Taxes

The IRS's offer in compromise program does have written guidelines and formulas to help you calculate an acceptable amount. To be approved, the taxpayer must clearly be a 'can't pay' rather than a 'won't pay,' and the taxpayer must be demonstrably paying his current taxes on time. Beyond these basic considerations, though, the Revenue Officers who handle these cases are given much discretion, and there is no certainty that even an offer fully meeting these criteria will be approved.

The IRS's willingness to approve offers in compromise shifts with the political winds (both internal and external), rarely striking what I consider an appropriate balance. They now seem to be moving towards a period in which many fewer offers are approved. That alone should be an incentive for those with old tax debts to apply now, before the climate reaches an Ice Age. But here's an added incentive: Effective Nov. 1, they will charge a $150 fee to submit an offer in compromise. Supposedly, it's to defray the cost of the program in a time of budgetary constraints (right) and to discourage frivolous applications. What it really will mean, I fear, is that the really impecunious'those who most need and deserve to have tax debts wiped out'will be shut out.

Warm or cold, the offer in compromise program is just about the only official option for those with federal tax bills they cannot pay, since bankruptcy will not generally wipe out federal tax debts. IRS collectors can temporarily put accounts into a 'currently not collectible' classification for a period of time, and if that persists through enough renewals, the debt will eventually be too old to be legally enforceable. But who wants that sitting out there on their credit reports for a decade or more?

Are there money or tax questions you would like to see discussed in this column? Let me know, at 2835 N. Sheffield, Suite 311, Chicago, IL 60657, or call 773/525-1778 (888/525-1778 toll-free outside the Chicago area) or e-mail greg@gregmermel.com.

Greg Mermel is a certified public accountant whose clients in the arts range from individual performers to major theatre companies and suppliers. He also sometimes produces theatre.

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