IRS Announces More Flexible Offer-in-Compromise Terms

On May 21, 2012, the Internal Revenue Service (IRS) announced more flexible terms to its Offer in Compromise (OIC) program.1   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 generally is not accepted if the IRS believes the liability can be fully paid in a lump sum or through an installment agreement.

In evaluating an OIC, the IRS conducts a financial analysis by reviewing a taxpayer’s assets, income and allowable expenses.  It then makes a determination of the taxpayer’s “reasonable collection potential” which forms the basis of an OIC.

The IRS’ most recent announcement on its OIC program provides greater flexibility for taxpayers on the financial analysis by:

  • Revising the calculation for a taxpayer’s future income by reducing it to 12 months of future income for an OIC paid in 5 or fewer months (down from 48 months) and to 24 months of future income for an OIC paid in 6 to 24 months (down from 60 months);
  • Allowing taxpayers to repay their student loans;
  • Allowing taxpayers to pay state and local delinquent taxes; and
  • Expanding the Allowable Living Expense categories and amounts (i.e., allowing greater exemptions for cash, motor vehicles, airplanes and boats and transportation expenses and narrowing the definitions of dissipated assets and retired debt that can increase a taxpayer’s reasonable collection potential).

Applying for an OIC is a complex process and requires a thorough understanding of IRS rules to achieve the best result.  Settling your tax debts for “pennies on the dollar” as advertised on late-night infomercials is the exception rather than the norm.

Depending on how old your tax debts are, it may not be in your best interests to submit an OIC and doing so, when it is not appropriate, could exacerbate your tax problem.

1 IR-2012-53

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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