IRS Allows Greater Flexibility in Offer in Compromise
In a move to help taxpayers settle their tax bills more easily, the IRS is allowing more flexibility to those applying for the Oerffer in Compromise (OIC) program. The OIC program allows taxpayers to clear off their tax debts by paying less than the amount owed due to the financial constraints of the taxpayer. Not everyone gets an OIC. The IRS will not permit an OIC to be given to those who they believe are able to pay their taxes either in one lump sum or in progressive payments. Hence the IRS applies very stringent rules to determine who qualifies for the OIC. These rules have to do with the taxpayer’s income and assets that determine the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.
The revised rules have to do with the financial analysis used to determine which taxpayers qualify for an OIC. The IRS said that other changes in the program include revising the calculation of the taxpayer’s future income and expanding the allowable living expense allowance category and amount.
Under the new (revised) rules, when determining a taxpayer’s reasonable collection potential, the IRS will now look at only one year of future income for offers paid in 5 or fewer months when previously it was four years. For offers paid in 6 to 24 months, the IRS will look at two years of future income. Previously it was five years. All offers must be fully paid within 24 months of the date the offer is accepted.
Other changes to the program pertain to the narrowing of parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. At the same time equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses. These are the efforts put in by the IRS to make the criteria for an OIC better reflect the current real-world situations.
The allowable living expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. These standards take into consideration how much a person needs to spend for basic necessities in a given geographical location. Since cost of living differs throughout the country, this way of analyzing a taxpayer’s payment ability is more fair and accurate. These standards are used when evaluating installment agreement and offer in compromise requests.
Furthermore, the National Standard miscellaneous allowance has been expanded and now includes more expenses like credit card payments and bank fees and charges. Guidance has also been clarified to allow payments for loans guaranteed by the federal government for your 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.
All these come under the latest phase of the IRS Fresh Start program. Because of these changes, you can now potentially resolve your tax issues in two years compared to four or five years in the past, says the IRS.
IRS Commissioner Doug Shulman said, "This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years. It is part of our multiyear effort to help taxpayers who are struggling to make ends meet."