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.