The Internal Revenue Service (IRS) recently announced, under release IR-2012-53, that they will expand their “Fresh Start” initiative by offering more flexible terms in their Offer in Compromise (OIC) program. An OIC is one method a taxpayer can use to settle his IRS tax debts. Unlike an installment agreement, which requires full repayment over a period of time, an OIC is a settlement for less than the total tax liability. Additionally, an OIC is subject to acceptance by the IRS and taxpayers must meet certain criteria before the IRS will agree to accept an OIC. In particular, the IRS examines each taxpayer’s “reasonable collection potential” by comparing the tax owed to the person’s assets and current and future income. The IRS makes the determination as to what the taxpayer is capable of paying through review of the taxpayer’s current income and assets.
Under the expanded program, the IRS will now look at only one year of a taxpayer’s future income for offers with obligations paid in less than five months. This is a big change, down from the four years the IRS would use when calculating the taxpayer’s collection potential. For offers where repayment terms range from six to 24 months, two years of future income will be reviewed, down from five under the previous program. All accepted offers of compromise must be paid within 24 months.
The IRS is also implementing changes to a taxpayer’s 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.
To read the IRS announcement in its entirety click here.