The IRS announced on May 22 (IR-2012-53) major revisions to its Offer-in-Compromise (OIC) program which may allow many more taxpayers to resolve their IRS tax problems. What is an OIC? It is an agreement between the taxpayer and the IRS that settles a tax debt for less than the full amount owed. This program provides eligible taxpayers with a means to pay off their debt and get a “fresh start” with the IRS. An appropriate offer is based on what the IRS considers the taxpayer’s true ability to pay. Submitting an offer does not ensure that the IRS will accept it. To be eligible for the OIC, you must file all tax returns you are legally required to file and to make all required estimated tax payments for the current tax year.
The IRS changes were made with the objective to enable a larger number of financially distressed taxpayers to clear up their tax problems faster than in the past. While resolving tax problems might previously have taken four or five years, taxpayers may now be able to resolve their problems in as little as two years. Changes announced by the IRS include revising the calculation for the taxpayer’s future income, allowing taxpayers to repay their student loans, allowing taxpayers to pay state and local delinquent taxes, and expanding the allowable living expense allowance category and amount.
The IRS determines a taxpayer’s reasonable collection potential, based on the taxpayer’s income and assets, to determine if the liability can be paid in full as a lump sum or through a payment agreement. When calculating this potential, the IRS will now look at only one year of future income for OICs paid in five or fewer months, down from four years, and two years of future income for OICs paid in six to 24 months, down from five years.
When conducting financial analysis to evaluate a taxpayer’s ability to pay, the IRS applies allowable living expense standards that incorporate average expenditures for basic necessities for people in similar geographic areas. These standards are used when evaluating installment agreements and OIC requests. The miscellaneous allowance portion of the standards has been expanded to include additional items, such as credit card payments and bank fees and charges. The IRS has also modified guidance to clarify that it will allow payments for student loans for post-high school education, if the loans are guaranteed by the federal government. Further, payments for delinquent state and local taxes may be allowed based on a percentage basis of tax owed to the state and the IRS.
For those taxpayers who are waiting for an IRS decision on their pending OIC or plan to appeal the IRS denial of their OIC, this announcement may be of a major benefit to you.