Offer In Compromise Rules Relaxed by IRS. Big News!

I do not normally get motivated by IRS changes in collection rules, but yesterday’s change to the Offer in Compromise (OIC) program was fairly significant. As you know, this program allows taxpayers, who qualify, to settle their tax liability in full for an amount less the full liability owed.

There are many deceptive companies who publish that they can get a taxpayer into these by negotiating with the IRS. The rules for an OIC are computational in nature and rarely have any negotiation needs to qualify – i.e. you either qualify and can pay the offer amount or you don’t. Yesterday, the IRS changed some of its computational rules that may make the program more attractive to those who qualify.

Some background:

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In the past three years, the IRS has been attempting to help financially distressed taxpayers. In 2008, it relaxed the lien filing rules for those who owed and could not pay. Last year, they streamlined the investigation process for the OIC. Earlier this year, the IRS relaxed the streamlined installment agreement rules to allow taxpayers who owe up to $50,000 to get into a 6-year payment plan. Yesterday, the IRS changed some of its computations related to the OIC.

The computation of an OIC is based on the reasonable collection potential of the taxpayer. If the tax can be paid before the collection statute of limitation expires, the taxpayer does not qualify for an offer in compromise. Reasonable collection potential is computed as:

  • the monthly disposable future income of the taxpayer (as computed according to IRS future income rules and allowable living expense limitations) times the number of months remaining on the collection statute of limitations, plus
  • the net equity in assets, including any assets that have been dissipated since the tax liability was incurred and not used to pay necessary living expenses of the taxpayer
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The IRS changes announced yesterday changed the future income computation, allowed some expenses that were not previously allowed, and clarified the rules to provide some relief to business taxpayers.

The changes:

There are 4 significant changes to the OIC:

  • If a taxpayer qualifies, the computation of the offer amount can be significantly less – the monthly disposable income multiplier was reduced from 48 months to 12 months. This could lower an offer amount significantly. For example, a taxpayer who has $300 a month in monthly disposable income would have to pay $14,400 for the future income component in the old OIC rules (48 months @$300) plus their net equity in assets. Under the new rules, this amount would be $3,600 (12 months @$300).
  • Taxpayers are now allowed, in certain circumstances, expenses for payment of student loans in the computation of monthly disposable income. In the past, these expenses were not allowed.
  • Taxpayers are allowed payments for state liabilities owed in proportion to the amount they owe for federal taxes. In the past, these expenses were not allowed.
  • Business taxpayer rules have been clarified to not add equity in business assets to the asset component of the OIC calculation

What this means is that more will qualify AND have the ability to pay the offer amount- which is often the largest roadblock to obtaining an OIC.

As always, my consumer tip is to beware of anyone who says you qualify without looking at the computation in detail.

Jim Buttonnow, CPA, CITP

Jim Buttonow, CPA/CITP, practices in the area of IRS and State tax controversy. He has more than 29 years of experience in IRS practice and procedure. Reach Jim at jim@buttonowcpa.com or through his website www.buttonowcpa.com
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