Offers in Compromise (OIC) offers taxpayers an option to resolve their tax debt for less than the amount owed. The Internal Revenue Service (IRS) recently announced more flexible OIC terms to assist financially distressed taxpayers. These changes are part of the “Fresh Start” initiative, an IRS program designed to put in place “common-sense” changes that more closely reflect “real-world situations.”
New terms
The changes include:
- 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
New calculation formulas
The IRS will use the following new formulas to calculate a taxpayer’s reasonable collection potential:
- One year of future income for offers paid in five or fewer months, down from four years
- Two years of future income for offers paid in six to 24 months, down from five years
- Narrowed parameters and clarification of when a dissipated asset will be included in the calculation
- Equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses
- All offers must be fully paid within 24 months of the date the offer is accepted
- The Form 656-B, Offer in Compromise Booklet, and Form 656, Offer in Compromise, has been revised to reflect the changes
Expanded allowable living expenses
Additionally, the IRS has expanded the National Standard miscellaneous category to include:
- Expenses such as credit card payments and bank fees and charges
- Payments for loans guaranteed by the federal government for the taxpayer’s post-high school education
- Payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS
Earlier this year, the IRS announced New Penalty Relief and Expanded Installment Agreements.
Please see the IRS website for more details or contact a tax attorney with specific questions.