More On Tax Planningfrom The Advisor's Professional Library
- Selected Provisions of the American Taxpayer Relief Act of 2012 The experts of Tax Facts have produced this comprehensive analysis of selected provisions of the American Taxpayer Relief Act of 2012 (the Act) to provide the most up-to-date information to our subscribers. This supplement analyzes important changes to the tax code with emphasis on how these developments impact Tax Facts’ major areas of focus: Employee Benefits, Insurance, and Investments.
- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
With economic conditions far from perfect and unemployment remaining stubbornly high, many more people are facing continuing financial difficulties. The somewhat more compassionate Internal Revenue Service has offered more flexible terms to its “Offer in Compromise” (OIC) program, along with other measures. This should enable some of the most financially distressed taxpayers to clear up tax problems more quickly.
The IRS is focusing on the financial analysis used to determine which taxpayers qualify for an OIC. Some taxpayers will now be able to resolve their tax problems in as little as two years, compared to four or five years.
In certain circumstances, the changes include:
- Revising the calculation for the taxpayer’s future income.
- Allowing taxpayers to repay student loans.
- Allowing taxpayers to pay state and local delinquent taxes.
- Expanding the “Allowable Living Expense” allowance category and amount.
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 the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential.
When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to twenty-four months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted.
Other changes to the program include narrowed parameters and clarification of when an asset will be included in the calculation of reasonable collection potential. In addition, equity in incomeiproducing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.
The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness 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 National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.
Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer's post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on a percentage basis of tax owed to the state and IRS.
In other areas, the IRS recently announced lien relief for taxpayers trying to refinance or sell a home. In 2009, the IRS added new flexibility for taxpayers facing payment or collection problems. The IRS also expanded the threshold for small businesses to resolve tax issues through installment agreements. Finally, earlier this year, the IRS increased the threshold for a streamlined installment agreement, allowing individual taxpayers to set up an installment agreement without providing a significant amount of financial information.
So, all in all, the IRS seems to be trying to help taxpayers. It is part of its intended approach to be more taxpayer friendly and customer oriented.