Times are tough. Many taxpayers owe the IRS big bucks. Fortunately, the IRS is taking steps to help them.
The IRS recently announced an expansion of its "Fresh Start" initiative by offering more flexible terms to its Offer in Compromise (OIC) program. This is intended to enable some of the most financially distressed taxpayers to clear up their tax problems more quickly than in the past — in as little as two years compared to four or five years.
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. However, the IRS won’t agree to accept less than it’s owed unless you can show you really can’t pay the full amount — either as a lump sum or over time through a payment agreement.
The IRS looks at your income and assets to determine your "reasonable collection potential." You must provide detailed information about your financial situation, including cash, investments, available credit, assets, income and debt.
The good news as that when the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. This can result in a huge reduction in how much you have to pay to have your OIC accepted by the IRS.
For example, under the old rules you had to pay an amount equal to at least four years of your monthly disposable income. If you had $500 in monthly disposable income, your minimum OIC had to be $24,000 (assuming you owed at least that much). Now, a person with $500 in monthly disposable income could make an offer as low as $6,000, so long as it is paid within five months.
Other changes to the OIC program include allowing taxpayers to have higher allowable monthly expenses when determining their monthly disposable income. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.
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.
Note that before you submit your offer, you must (1) file all tax returns you are legally required to file, (2) make all required estimated tax payments for the current year, and (3) make all required federal tax deposits for the current quarter if you are a business owner with employees.
Moreover, if you or your business is currently in an open bankruptcy proceeding, you are not eligible to apply for an offer. Your debts need to be resolved in your bankruptcy proceeding — that’s what bankruptcy is for.
For full details on the OIC program, see the IRS Form 656 booklet, available at www.irs.gov.