A look at the IRS's Offer in Compromise program

February 24, 2013

A look at the IRS's Offer in Compromise program

Article provided by Boelter & Associates
Visit us at http://www.boeltertaxlaw.com

If you have received a letter or notice from the Internal Revenue Service stating you owe a tax amount and the amount is burdensome, speak to an experienced tax attorney about resolving the tax liability through the IRS's offer in compromise program. An offer in compromise is an agreement between the taxpayer and the IRS that settles a taxpayer's tax liabilities for less than the full amount owed.

If paying a full tax liability creates a financial hardship, an offer in compromise may be a legitimate option. The IRS determines a taxpayer's situation by looking at his or her ability to pay, income, expenses, and asset equity. If it's determined the tax liability can be paid through an installment agreement, the taxpayer will likely not be eligible. However, the IRS generally approves an offer in compromise when the amount offered by the taxpayer represents the most the IRS can expect to collect within a reasonable time period. The IRS determines whether it will accept an amount according to a formula called the reasonable collection potential of the taxpayer. The way a taxpayer's reasonable collection potential is calculated recently changed.

Changes to reasonable collection potential formula

Under the original Offer in Compromise program, the IRS form asked the applicant to state his or her monthly income and expenses. The difference between the two numbers was multiplied by 48 if the taxpayer intended to pay the amount in less than five months or was multiplied by 60 if the taxpayer intended to pay it off over a longer period of time. For example, if your income was $2500 per month and your allowable expenses, defined by the IRS, were $2400 per month and you wish to pay off the amount immediately, the IRS may have been willing to accept $4800 plus the net quick sale value of assets in which you have equity. The IRS has a set of standards that determine housing, transportation and household expenses. Therefore, your rent or mortgage could be higher in reality than what the IRS accepts as its standard expense for your geographic area.

Under the new rules, the IRS has relaxed its expense standards and will accept higher costs. In addition, student loan payments and delinquent state and local taxes are now considered expenses--before those costs were not considered in the formula. Also, the IRS is reducing the multiplier from 48 or 60 to 12 or 24 respectively. Finally, if you own an ongoing business and have equity in business assets, those assets are no longer considered in the reasonable collection potential when adding the value of total assets to disposable income.

What happens when the IRS accepts or rejects an offer

If the IRS accepts the taxpayer's offer, the taxpayer must fully comply with all tax laws, cannot be delinquent in payment and must abide by all of the terms and conditions of the offer in compromise. One of the conditions is that the taxpayer must timely file and pay all taxes for a period of five years from the date of acceptance of the offer in compromise. If the taxpayer does not abide by the conditions, the taxpayer is in default, and the agreement is no longer effective. Therefore, the IRS may collect the original amount owed plus interest and penalties.

If the IRS rejects the taxpayer's offer in compromise, the taxpayer will be notified by mail. The letter will outline the reason for the rejection and provide instructions on how to appeal the decision. The appeal must be made within 30 days from the date of the letter, not the date when the taxpayer receives the letter.

While unbelievable to many, the IRS wants to work with taxpayers to resolve tax liabilities. If you have a tax liability, consult an experienced tax attorney who can provide guidance and help you resolve your tax issue before it worsens.