The IRS announced the other day that it is offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past. In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.
The new guidelines are announced in a news release by the IRS (IR-2012-53, May 21, 2012). More details are available in Attachment 1 to Internal Revenue Manual (IRM) 5.8.5 Financial Analysis. The changes are extraordinary.
The IRS recognizes that many taxpayers are still struggling to pay their bills so it has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations.
An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through an installment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential.
The announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.
The new guidelines also include changes to the necessary living expenses:
Allowing taxpayers to repay their student loans.
Expanding the Allowable Living Expense allowance category and amount.
Revising the calculation for the taxpayer’s future income.
Allowing taxpayers to pay state and local delinquent taxes.
When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The deferred payment option which allows payment over the life of the statute is no longer available.
Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In general assets which have been dissipated three years or more prior to the submission of the offer in compromise will not be included in the reasonable collection potential. For example, if the offer is submitted in 2012, any asset dissipated prior to 2010 should not be included.
In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses unless it is determined the assets are not critical to business operations.
Allowable Living Expenses
The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests.
The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.
Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer’s post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.
If you have a tax problem, then have a tax attorney help. Call Mitchell A. Port at (310) 559-5259.