The IRS dramatically liberalized its Offer in Compromise Program (“OIC”) which will allow the most financially distressed taxpayers to obtain a fresh start and clear up tax problems fast.
Generally speaking, the Offer in Compromise 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 rejected if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. To make a determination, the IRS looks at the taxpayer’s income and assets to assess the taxpayer’s reasonable collection potential. The reasonable collection potential is calculated by reviewing a taxpayer’s equity and future income potential.
Despite being promoted by unscrupulous tax resolution firms as an easy way for most taxpayers to settle for less than what was owed, the reality was that the Offer in Compromise program was rarely accepted. Mostly, because of the IRS strictly applied its rules with respect to a taxpayer’s budget and valuation of assets. As a result, most taxpayers who sought a tax settlement received a rejection. The new changes may open up the program to those who were previously rejected. Specifically, the new changes include the following:
- 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.
Under the new program, when calculating a taxpayer’s future income, the multiplier is being reduced. Instead of taking the disposable income amount and multiplying it by 48 or 60, the IRS will multiply by 12 or 24, respectively. This revision will result in significant tax savings and will settle tax obligations in no longer than two years as opposed to five years.
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.
Previously, student loan payments and delinquent state and local income taxes were not allowable expenses, but now those numbers will be considered in the formula. Additionally, a miscellaneous allowance will be included where a certain percentage of credit card payments can be listed as an allowable expense.
Although the program is not for everyone, the liberalized OIC may provide the best alternative to resolving your tax problem. At the Law Office of Todd S. Unger, Esq., LLC. we can help you determine if you are a viable candidate for an Offer in Compromise.