In 2011, the IRS began a “Fresh Start” initiative, offering a series of programs designed to help individual taxpayers and small businesses resolve tax debts with the IRS and avoid tax liens on their assets. As part of the Fresh Start initiative, the IRS announced in May 2012 that it was changing the eligibility requirements for the Offers in Compromise program. Taxpayers should understand what the Offer in Compromise program is and how the IRS has changed the requirements of the program.
What Is an Offer in Compromise?
The Offer in Compromise program allows taxpayers who owe the IRS money for unpaid taxes to settle the debts for less than the full amount if the taxpayer can show that he or she cannot repay the debt or doing so would create a financial hardship. The IRS accepts offers from taxpayers when it believes that the offer is the most money that it can reasonably expect to see from the taxpayer in the foreseeable future.
The IRS considers several factors when deciding whether to accept a taxpayer’s offer, including the taxpayer’s:
- Ability to pay
- Allowable expenses, as calculated by the National Standards tables
- Equity in assets
The IRS takes the difference between the taxpayer’s monthly income and expenses and multiplies it by either 48 or 60, depending on whether the taxpayer intends to pay the debt in less than five months or over a longer period. The IRS then adds that amount to the net income from the sale of any assets in which the taxpayer has equity to determine if the taxpayer’s offer is sufficient.
What Changed in the Offer in Compromise Program?
In an effort to encourage people to settle their tax debts and increase productivity in the economy, the IRS has changed the way that it calculates acceptable offers under the Offer in Compromise program. The IRS had new National Standards tables for housing, transportation and household expenses, reflecting the higher cost of living. The IRS will now take unsecured debt such as credit cards, student loans and delinquent state or local taxes into account as “miscellaneous expenses” when calculating how much a taxpayer can afford to pay, whereas in the past the IRS did not factor those expenses into its calculation.
The IRS has also changed how it views assets. It will not consider equity-producing assets for small businesses as income. Additionally, the IRS has narrowed the definition of what assets count in calculations of collection potential.
Finally, for those who intend to pay the debt in five months or fewer, the IRS will only consider one year of future income in collection calculation, rather than four years as in the past. Similarly, for those who will pay the debt in six to 24 months, the IRS will only calculate two years’ worth of future income, rather than five years as they previously considered.
How Do Taxpayers Make Offers?
The thought of approaching the IRS to try to settle tax debts may be intimidating for many. In the past, the IRS has only accepted about 34 percent of the offers to settle tax debt it received under the Offer in Compromise program. Experts suggest that that percentage will increase under the new rules, and the time it takes for the IRS to process offers will decrease. Those who have questions about making an offer to the IRS to settle tax debts should consult an experienced tax attorney who can discuss their situations and assist them in the offer process.