One of the methods available to such distressed taxpayers is to enter into what is known as an Offer in Compromise (“OIC”) with the Internal Revenue Service (“IRS”). If the offer is ultimately agreed to by the taxpayer and the IRS, the amount agreed upon which is less than the total outstanding debt, once paid, would be deemed to be a 100% satisfaction of the outstanding liability. In order to have an OIC considered, the taxpayer must be able to demonstrate one of three things:
In most such cases, the taxpayer requests and Offer based on the fact that they did not have the funds available to them to satisfy the tax liability in full and it would be extremely difficult and create a hardship to use the available funds to pay the tax liability and likely result in the inability to pay their living expenses.
Recently however, the number of OIC’s that have been accepted by the IRS has increased from roughly 25% to 33% of the OIC’s submitted,
On May 21, 2012 the IRS announced in IR-2012-53 an expansion of its “Fresh Start” initiative by offering more flexible terms to its OIC Program.
Today’s 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.
In certain circumstances, the changes announced today 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.
- Expanding the Allowable Living Expense allowance category and amount.
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 Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise, has been revised to reflect the changes.
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 addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.
It has been our experience that these new standards are actually being applied by the IRS in determining the amount of an OIC, particularly in the area of doubt as to collectability.
Taxpayers who are Struggling Financially, have outstanding Federal Tax Liabilities and would like to make an OIC should