IRS Makes it Easier to Settle Tax Debt for Less

November 28, 2012

The Internal Revenue Service recently announced an expansion of its "Fresh Start" program, by offering more flexible terms in its Offer In Compromise program. The changes in terms are designed to allow many of the most financially distressed taxpayers the opportunity to clear up their tax problems--in many cases more quickly than was available in the past.

An Offer In Compromise (OIC) is an agreement between a taxpayer and the IRS that settles the taxpayer's past-due taxes for less than the full amount. In general, the IRS does not accept OICs if it believes that the full amount of the taxes owed can be paid over time through a payment agreement or all at once as a lump sum. The IRS looks at the taxpayer's current and future income and assets to determine whether the taxpayer can pay back the full amount of taxes--or the "reasonable collection potential" as it is called.

Prior to the changes to the OIC program, the IRS strictly applied its rules to taxpayers' budgets and valuation of assets. Because of this, the majority of taxpayers who pursued an OIC were rejected.

New policy changes

However, the changes focus on the financial analysis the IRS uses to determine which taxpayers qualify for an OIC. The changes are meant to take into account real-world situations. The changes announced are:
- A revision of how a taxpayer's future income is calculated
- Allowing taxpayers to pay their student loans
- Allowing taxpayers to pay local or state taxes owed
- An expansion of the Allowable Living Expense allowance category and amount

For many taxpayers owing taxes, how the IRS calculates future income will be the most significant change.

Under the new policy, when the IRS calculates the reasonable collection potential of a taxpayer, it will now only consider one year of future income for offers that are paid in five or fewer months. This is down from four years under the old policy. In addition, under the new policy, the IRS will now only consider 2 years of future income for offers paid within six to 24 months--down from 5 years. All offers must be paid within two years from the date that the offer is accepted.

Under the prior policy, the IRS often demanded very large payments, even when the taxpayer had very few assets. The new policy provisions are estimated to reduce the amount needed to settle tax obligations in five or fewer months by 75 percent. The new policy is also expected to reduce the total amount required to be paid within two years by 60 percent.

In addition to the changes to the calculation of future income, the IRS expanded the Allowable Living Expenses that it uses to help determine taxpayers' abilities to repay tax debts. Under the new changes, taxpayers can now include more things under the National Standard miscellaneous allowance, such as credit card expenses and bank fees.

The IRS also has made clarifications to the process for making OICs for federally backed student loans and for paying state and local tax debt as a percentage of the amount a taxpayer owes to the federal government.

Consult an attorney

The recent changes will likely make taxpayers more likely to be eligible for the OIC program, allow them to settle their tax liabilities for much less than what was required in the past. If you owe past-due taxes, contact an experienced tax attorney. An attorney can answer your questions about the OIC program and work to settle your tax debt for a fraction of what you owe.

Article provided by Joseph R. Viola, P.C.
Visit us at www.jrviola.com