Hertsel Shadian, Attorney at Law, LLC

New IRS Tax Debt Relief Available

In May, 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 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. (See more detail about the changes in the article below.)

To learn more about the OIC process and the available options, contact our office today by email using the contact form below, or call our office toll-free at (888) 971-3411.

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IRS Announces More Flexible Offer-in-Compromise Terms to Help a Greater Number of Struggling Taxpayers Make a Fresh Start

The announcement by the IRS in May, 2012, focused on the financial analysis used to determine which taxpayers qualify for an OIC. The announcement also enables some taxpayers to resolve their tax problems in as little as one or two years, compared to four or five years as was the case in the past. While these changes are very positive, it is difficult to know how long the IRS will maintain these new standards for OICs. Accordingly, for taxpayers that have large, past due and unresolved tax debts, now might be the best time to take advantage of these changes to submit an OIC and potentially resolve years of large tax debts.

OIC Changes. In certain circumstances, the changes recently announced include:

  • Revising the calculation for a taxpayer’s future income (from 4-5 years, down to 1-2 years).
  • 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.

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. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at a taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements. According to the IRS, it recognized that many taxpayers still were struggling to pay their bills, and so it has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations.

When the IRS calculates a taxpayer’s reasonable collection potential, it now will look at only one year of future income for offers paid in five or fewer months (down from four years), and will look at only 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.

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 are intended to 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 now 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.

These changes are intended as another in a series of steps to help struggling taxpayers under the IRS’ Fresh Start initiative. In 2008, IRS announced lien relief for taxpayers trying to refinance or sell a home. The IRS added new flexibility for taxpayers facing payment or collection problems in 2009. The IRS made further changes to their lien policies in 2011 and expanded the threshold for small businesses to resolve tax issues through installment agreements. Then, in early 2012, the IRS increased the threshold for a streamlined installment agreement allowing individual taxpayers to set up an installment agreement without providing a significant amount of financial information.

For more information about the OIC process and whether you can qualify, contact us by email using the contact form above, or call our office toll-free at (888) 971-3411. We would be happy to discuss the details further. Please also feel free to share this information with others that might benefit from this information.