IRS Liberalizes Offer In Compromise Terms Under “Fresh Start” Initiative
The IRS has expanded its “Fresh Start” initiative, which is designed to help struggling taxpayers who owe taxes by offering more flexible terms in its Offer In Compromise (“OIC”) program. These changes may allow some taxpayers to resolve their income tax problems in as little as two years, as compared to four or five years in the past.
Specifically, the IRS has revised the calculation used to determine a taxpayer’s future income, and expanded the amount of allowable living expenses. The IRS will now also consider credit card payments, bank fees and charges, student loan payments, and state and local delinquent taxes in determining OIC eligibility.
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 that the liability can be paid in full through a payment agreement or in a lump sum. When deciding whether to accept an OIC, the IRS examines the taxpayer’s income and assets to make a determination of the taxpayer’s Reasonable Collection Potential (“RCP”).
Where financial analysis is needed to determine a taxpayer’s ability to pay, the IRS uses the Allowable Living Expense standards, which provide consistency 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 Fresh Start OIC initiative focuses on the financial analysis used to determine which taxpayers qualify for an OIC. When the IRS calculates a taxpayer’s RCP, for offers paid in five or fewer months, it will now look at only one year of future income, rather than four years. For offers paid in six to 24 months, the IRS will now look at only two years of future income, rather than five years.
The IRS has also made other changes to the OIC program, including narrowed parameters and clarification of when a dissipated asset (i.e., an asset that is no longer available to pay a tax liability because the taxpayer has sold, given away, or spent it on non-priority debts) will be included in the RCP calculation. In addition, equity in income producing assets will generally not be included in the calculation of the RCP for an on-going business. Finally, the new OIC initiative also provides that the National Standard miscellaneous allowance has been expanded to include allowance for expenses such as credit card payments and bank fees and charges.
While not a panacea to all past due income tax liabilities, the liberalized OIC terms will certainly allow many taxpayers to make an Offer In Compromise who were previously unable to qualify. For additional information on the Fresh Start initiative, and other IRS announcements, visit www.irs.gov