On May 21, 2012, the IRS announced new guidelines that will increase the number of taxpayers who will be able to qualify for an Offer in Compromise. (IR-2012-53.)
The announcement reflects a “Fresh Start” initiative of the IRS to help struggling taxpayers.
In general, an Offer in Compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount that he or she owes.
The amount of an Offer in Compromise has always been determined by the reasonable collection potential of the taxpayer: Adding the taxpayer’s “future income” to the “realizable value” of his or her assets (i.e., liquidation value of equity in assets).
“Future income” is an estimate of a taxpayer’s ability to pay based on an analysis of his or her “monthly available income” measured over a specific number of months into the future.
In the past, a taxpayer who could pay the Offer amount in five monthly installments was required to multiply his “monthly available income” by 48 months to arrive at “future income.” A taxpayer who wanted to pay the Offer in 24 monthly installments was required to multiply his “monthly available income” by 60 months to arrive at his future income.
Now, under the revised guidelines, “future income” is determined by multiplying the “monthly available income” by 12, if the Offer can be paid in 5 monthly payments or less or, by 24, if the taxpayer needs 24 months to pay the Offer amount in full.
One huge change to the guidelines is that the IRS now allows a deduction in determining “monthly available income,” for payments for: (A) loans guaranteed by the federal government for the taxpayer’s post-high school education; and (B) delinquent state and local taxes based on a percentage basis of tax owed to the state and IRS.
These deductions are available in the calculation if the taxpayer verifies that the loan is guaranteed and substantiates that the state and local tax payments are being made.
Taxpayers with student loan debt, but who have not yet made arrangements to repay the loan, will be allowed 10 days to set up a payment plan for the student loan and provide verification to the IRS. If there are extenuating circumstances, additional time may be allowed.
You should note, however, that an Offer in Compromise will not be accepted if the IRS believes that the liability can be paid in full through an installment payment agreement or in a lump sum, unless unique circumstances exist (e.g., illness or some other severe hardship).
Nevertheless, if a taxpayer does not qualify for an Offer in Compromise, a taxpayer may consider an installment payment arrangement to avoid IRS collection action.
The IRS’s new “Fresh Start” initiative affords streamlined installment agreements for more taxpayers. In the past, the IRS generally was required to enter into installment agreements requested by individuals whose aggregate tax liability did not exceed $10,000, if the IRS determined that the taxpayer was financially unable to pay the tax liability in full within two years. Now, the IRS allows taxpayers who owe up to $50,000 in back taxes to enter into streamlined agreements that stretch out the payments over a series of months or years. The IRS also increased the maximum term for streamlined installment agreements to 72 months from the previous 60-month maximum.
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