Tax Law Updates | New Statutes, Regulations, and Rulings
June 13, 2012
IRS Issues Interim Guidance to Expand Offers in Compromise
Interim Guidance Memorandum for Offer in Compromise Defined in IRM 5.8.5, Financial Analysis
IRS No. IR-2012-53, IRS Control Number: SBSE-05-0512-041, 5/21/2012
The Internal Revenue Service has expanded its “Fresh Start” initiative by issuing a new Guidance to include flexible terms to its Offer in Compromise (OIC) program.
The new Guidance focuses on the financial analysis used to determine which taxpayers qualify for an OIC. The release also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.
In certain circumstances, 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.
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. OICs are subject to acceptance on legal requirements.
When the IRS calculates a taxpayer’s reasonable collection potential, it will now consider 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 24 months, down from five years. 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.
Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.
Allowable Living Expenses
“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 IRS explained.
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 percentage basis of tax owed to the state and IRS.
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