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Tax Bites, Issue 1, September 2012

IRS Offers More Flexibility on Offers in Compromise

This article is the first in our series on the Fresh Start program, which the IRS implemented in 2011. In future articles we’ll look at other provisions of the program such as making it easier for more small businesses to participate in streamlined Installment Agreements.

If you owe more than $10,000 in federal tax debt, I have some good news for you. The IRS recently expanded its Fresh Start program to include more flexible terms for its Offer in Compromise (OIC) program. These changes will likely increase the number of offers that the IRS will accept and will help a lot of taxpayers who have been struggling since the recession.

According to the IRS, “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.” Of course, the IRS is unlikely to accept an offer for less than you owe, if they think you have the ability to pay your full tax debt.

In the past, the standards for the OIC program were very high. Less than 10 percent of those who applied for offers in compromise were approved. What the IRS has done is relaxed the standards to qualify for the program.

They’ve done this four ways:

  • Cutting in half the timeframe used to determine a taxpayer’s future income

  • Allowing taxpayers to repay their student loans

  • Allowing taxpayers to pay state and local tax debts

  • Expanding Allowable Living Expenses

Traditionally, in evaluating an offer in compromise, the IRS would consider your expected disposable income for the next four years. Now, they’re cutting that in half and will only be using your expected disposable income for the next 24 months to determine the amount of offer that they’ll accept.

With an OIC, you have certain expenses you can claim that lower your disposable income. In the past, you couldn’t claim student loan expenses; they were not considered a necessary expense. Now, the IRS is taking into consideration that many Americans owe student loans, so they’re including student loans as an allowable expense to help determine your monthly household allowable expenses.

And traditionally, the IRS would not consider other tax debts, like state and local taxes, as part of your allowable expenses. Now they’re recognizing that when individuals owe federal tax, they likely owe state and local taxes, as well. So, they’re also including other tax debts as allowable expenses.

Finally, they have expanded the Allowable Living Expenses to include expenses such as credit card payments and bank fees and charges, further increasing the allowable living expenses you can claim and reducing your expected future disposable income.

All of these changes combined mean that the IRS is likely to accept more Offers in Compromise and for lower amounts than in the past.

That means more of us can settle our tax debts while still paying other expenses and can be free from worrying about tax collection efforts from the IRS.

P.S. For more on how you can benefit from the Fresh Start program, you can visit the IRS website or call me, Katie Lawson, at 919-885-4019.

Katie Lawson is an experienced tax attorney serving clients in Raleigh, Durham and across North Carolina. She holds a bachelor’s degree in accounting from the University of South Carolina, a juris doctorate from the North Carolina Central University School of Law, and a master of laws degree in taxation from the University of Washington School of Law. She is active in the North Carolina Bar Association and the Durham County Bar.

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