Although the IRS is one of the most aggressive collection agencies out there, they are also somewhat practical in that they can be persuaded to realize when they are trying to squeeze blood out of a turnip. An offer in compromise is a type of tax resolution that can eliminate tax liability all together. The government does not accept an offer in compromise for any other reason than attempting to preserve its collection resources by not chasing after potentially uncollectable tax debt.
Imagine having the lion’s share of your IRS tax debt disappear and no longer owing the Federal Government. A successful Offer in Compromise (OIC) may do just that. If the relief or resolution is granted, then the taxpayer will be permitted by the IRS to settle his or her tax debt for less than the full amount due. This gives a taxpayer a clean slate with the IRS as long as the terms and conditions of the offer process are met and maintained. The IRS is can be somewhat forgiving. The real question is if a taxpayer qualifies for this forgiveness. In general, during the OIC process, the IRS reviews the taxpayer’s income and assets to determine their reasonable collection potential. An OIC is an agreement between the taxpayer and the IRS to settle the tax debt owed for the less that the total liability owed but ordinarily not for less than the taxpayer’s reasonable collection potential. The IRS will not accept an offer if the IRS believes the liability can be paid in full or paid through a payment agreement within its 10-year collection statute.
Prior to 2012, the IRS applied very rigid rules in determining how a taxpayer’s income and equity in assets were computed. In considering an OIC, the IRS computed the reasonable collection figure based off of future income computations and equity in assets to project what a taxpayer could potentially pay the government as a settlement figure. Congress, the Taxpayer Advocates and taxpayer representatives criticized the IRS OIC program due to its rigid computations which appeared to result in an overwhelming number of OIC rejections. However, times have changed and the IRS is currently working more diligently on giving taxpayers a true “fresh start” by being willing to entertain a greater number of OIC’s under less rigid computations of reasonable collection potential.
On May 21, 2012, the IRS announced more flexible terms to the OIC program and process under it’s “Fresh Start” initiative. This new initiative and the reform that has followed, reflects the most dramatic liberalization of IRS policies and procedures as they relate to an Offer in Compromise in the organizations history. The changes allow for an easier and more flexible process for those seeking to settle and eliminate IRS tax debt. Much of this change was prompted by the continued criticism by Congress of the IRS pre- 2012 Offer in Compromise program and relief track record. The “Fresh Start” initiative focuses on a change to the financial analysis used during the OIC process to determine if a taxpayer qualifies for a settlement. The overall goal of the IRS with this change is to give more taxpayers a “fresh start” by increasing the overall OIC acceptance rate.
The OIC program under this “Fresh Start” initiative has resulted in the following beneficial changes for taxpayers:
- Revised calculations of a taxpayer’s future income that considers the taxpayer’s current actual income and recent income history
- Allowed expenses for a taxpayer’s student loan payments
- Allowed expenses for a taxpayer’s state and local delinquent tax payments
Prior to May of 2012, the IRS applied stricter and more rigid rules regarding a taxpayer’s expenses and asset valuations. This led to a large percentage of rejections from the IRS or demands for unreasonably large compromise payments even where the taxpayer had limited resources. The IRS has projected that the fresh start initiative will lead to a 75% reduction in the average amount required to settle federal tax obligations. This reduction will result from the fact that the IRS will now consider only one year of future income for offers paid in five or fewer month and two years of future income for offers paid in six to 24 months. Previously, the IRS computed the future income based on a 4 or 5-year projection. This dramatic change has resulted in smaller and thus more reasonable IRS demands for compromise payments. These smaller IRS demands have allowed for more affordable settlement terms which has led to an overall increase in OIC acceptances. Overall, the IRS has been delivering on the “fresh start” they set out to provide taxpayers across the US back in mid-2012.
Other changes to the OIC program under the fresh start initiative include the following:
- Narrowed parameters of when a dissipated asset will be included in the IRS computations
- Equity in income producing assets will not be included in the computations for on-going businesses
- IRS employees are now directed to evaluate each case on the facts and circumstances when computing income and expenses
- Expanded allowable living expenses for taxpayers that include credit card expenses.
Overall, this new initiative will allow taxpayers a better chance at settling their IRS tax debt and obligations. It’s important to note that hiring an experienced tax attorney to assist with the filing of an OIC and engaging in OIC negotiations greatly increases a taxpayer’s chances at securing an acceptable offer. The Tax Law Offices of David W. Klasing is committed to recommend this potential form of tax resolution only where you are in a good position to potentially benefit from the tax relief. Our experienced tax professionals will carefully prepare your Collection Information Statement, which is required by the IRS. Our staff not only knows how to strategically represent your case before the IRS, but also strives to put you in the best financial position possible against the IRS and/or state tax agencies. Call our office, or book online, to arrange and initial reduced rate consultation.
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