On Monday, May 21, 2012, the Internal Revenue Service announced another expansion of its “Fresh Start” initiative by offering more flexible terms to its Offer in Compromise (“OIC”) program with the goal of assisting more financially distressed taxpayers in resolving their outstanding tax liability in two years or less.
Generally, there are four methods of resolving an assessed federal tax liability: (1) full payment, (2) payment through installments under a written agreement, (3) an offer in compromise, and (4) bankruptcy. The IRS also has the authority to temporarily suspend collection or payment of federal taxes through placing an account in currently non-collectible status.
An OIC is an agreement between the taxpayer and the IRS to settle a tax liability for payment of less than the full amount owed. The IRS will generally accept an offer in compromise when it is unlikely that the tax liability will be collected in full and the amount offered reasonably reflects collection potential. Most individual and business taxpayers who owe income taxes, payroll taxes, penalties or interest may submit an offer in compromise to settle their tax liability.
The revised OIC rules now provide that the IRS will look at one year, not four years, of future income for offers paid in five or fewer months and two years, not five years, of future income for offers paid in six to 24 months. All offers must be fully paid within 24 months of the date the offer is accepted.
The IRS has revised the rules for calculating an individual’s reasonable collection potential in the following ways:
- The IRS will reduce the amount of cash in a taxpayer’s bank account by a minimum $1,000 and will further exclude from the taxpayer’s asset/equity table the remaining balance in the bank account by the total amount of the taxpayer’s monthly allowable living expenses;
- The IRS will exclude up to $3,450 per car, up to two cars per household, from the net equity valuation of vehicles owned by the taxpayers provided the vehicles are used for work, the production of income, and/or the welfare of the taxpayer’s family;
- Additionally, the IRS will allow taxpayers additional operating expenses of $200 or more per vehicle for vehicles that are six years or older or has reported mileage of 75,000 miles or more;
- The IRS will allow as an expense the minimum payment on student loans guaranteed by the federal government for a taxpayer’s post-high school education;
- The Service will not include dissipated assets in the reasonable collection potential calculation unless the Service can show that the taxpayer sold, transferred, encumbered or otherwise disposed of assets in an attempt to avoid the payment of the tax liability or used the assets or proceeds other than for the production of income or the health and welfare of the taxpayer or their family; and
- When a taxpayer owes both delinquent federal and state or local taxes, and does not have the ability to full pay the liabilities, the IRS may allow monthly payments to state taxing authorities as an expense.
For business taxpayers, also, the IRS will exclude the equity in income producing assets from the reasonable collection potential of a viable, ongoing business unless it is determined the assets are not critical to business operations.
To apply, taxpayers must submit an offer in compromise using IRS Form 656 (Offer in Compromise) and include a detailed financial statement in support of the offer using Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals or Form 433-B (OIC), Collection Information Statement for Businesses. Upon making an offer, taxpayers will need to make either a lump sum cash offer with a 20% down payment or a deferred periodic/installment payment offer to satisfy the liability. If a taxpayer desires to make installment payments, he or she must continue to make monthly installment payments, not to exceed 24 months, while the offer is being considered by the IRS.
The revised offer in compromise rules will provide taxpayers with a resolution to their tax problems within two years as opposed to five years previously. The IRS has reduced the amount of future income in calculating taxpayer’s offer in compromise. With the rise in the number taxpayers who owe federally-backed student loans, the Service will allow the repayment of federal student loans as an expense. Finally, the Service has expanded and increased the allowable living expense categories which are used to calculate how much a taxpayer can reasonably be expected to pay after taking into income and expenses. In summation, the revised OIC program will allow more taxpayers to satisfy their federal tax liabilities, in a shorter amount of time, and for less than what a taxpayer owes to the government.