Taxpayers in the United States typically cringe at the idea of owing the government money that is above and beyond what is withheld throughout the year. Although most Americans grin and bear it while making jokes about Uncle Sam siphoning their bank account, there are some that are unable to pay the amount that they owe in full, if at all. Because the Internal Revenue Service’s business is collecting taxes that are owed, Congress has allowed them to take the mentality that “something is better than nothing” and accept payments that are less than the full amount owed, in full satisfaction of a taxpayer’s assessed taxes. And thanks to a few changes made to the Offer In Compromise program, it is more feasible for those who are facing large amounts of tax debt to settle for much less than they owe.
Under Internal Revenue Code §7122, the IRS is permitted to accept a payment that is less than the amount owed, in full satisfaction of a taxpayer’s debt. That Code provision is embodied in the IRS Offer In Compromise (OIC) program. The goal of the program is to assess a taxpayer’s assets and ability to pay over time to determine whether it is a wise move for the government to take a guaranteed amount of money immediately, or take their chances with the collections process. An offer made through the OIC program is sent to the IRS and if accepted, the taxpayer will agree to pay off the offer amount within 24 months, although the agreement could be tailored to require a payment period of less than two years.
As stated above, the IRS will first determine the value of a taxpayer’s assets once it receives an offer to settle a tax debt. The asset value analysis includes placing a monetary value on most of a taxpayer’s personal and real property. The thinking is that if a taxpayer has sufficient equity in his or her property to pay the full amount of the tax bill, the IRS has no reason to accept an offer. During the second part of an OIC offer analysis, the IRS will determine whether the taxpayer is capable of paying his or her entire tax bill with future income. This analysis can be quite tricky because for most American families, the money that comes in each month is nowhere near the amount that is left over after bills and other necessary expenses.
These sometimes-rigid analyses with regard to a taxpayer’s ability to pay back a tax debt drew tough criticism from the National Taxpayer Advocate Service (TAS). Reports from the TAS argued that many of the assets that the IRS took into account when determining a taxpayer’s equity in personal property should be excluded because it would not be feasible for a taxpayer to give up every piece of property or dollar that they had in order to pay back Uncle Sam. Furthermore, the TAS asked the IRS to change its policy on considering other types of debt when determining a future ability to pay.
In 2012, the IRS introduced a Fresh Start initiative, which purports to help taxpayers more easily qualify for an Offer In Compromise. The IRS took many of the TAS’s suggestions to heart in their changes to the OIC program. Some of the changes include excluding an amount of money in a taxpayer’s bank account when calculating their cash-on-hand. Furthermore, the IRS will disregard a portion of the value of a personal vehicle if it is used for the health and welfare of a taxpayer and their family. Finally, one of the notable changes that was a part of the Fresh Start initiative directs IRS agents to consider the amount of money that will be used to repay student loan debt or state or local tax debt in the future.
These changes have proven to be extremely effective and have caused the acceptance rate of Offers In Compromise to jump from a 30% maximum in 2010 to 42% in 2013. For taxpayers who are struggling to get by, but still want to stay compliant with their tax debt, the Offer In Compromise program may be an excellent way to get right with the government. The OIC program isn’t for everyone, but for the taxpayers that qualify, it is a lifesaver. An experienced tax attorney will be able to sit down with you and determine your eligibility as well as any other options that may help achieve your goals.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have years of experience helping taxpayers come into compliance with the IRS and California Franchise Tax Board. Although the thought of paying back a large amount of money to the IRS or other tax authority may be unpleasant, the repercussions of an IRS lien, levy, or wage garnishment are much more so. Contact the Tax Law Offices of David W. Klasing today for a reduced rate consultation.