Written by: Steven J. Fromm, J.D., LL.M. (Taxation)
The IRS has recently expanded its “Fresh Start” initiative by offering more flexible terms to its Offer-in-Compromise Program. These newest rules enable some financially distressed taxpayers to clear up their tax problems even quicker.
Generally, an offer-in-compromise (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 is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to determine the reasonable collection potential. However, good this may sound it is as with many things "easier said than done." Experience has found that these OICs are actually very hard to implement with the IRS.
It is believed that the IRS knew how hard it has been for taxpayer to actually obtain an offer in compromise. As a result, the IRS's streamlined their offer-in-compromise (OIC) program to speed up the processing of OICs for qualified taxpayers. Having started in 2010, the streamlined OIC program is relatively new. The IRS recently issued instructions to its examiners, urging them to process streamlined OICs as expeditiously as possible.
One recent survey estimates that one in 15 taxpayers is now in arrears on tax payments to the IRS to at least some degree. Because of continuing fallout from the economic downturn, however, the IRS has tried to speed up its compromise process to the advantage of both hard-pressed taxpayers and its collection numbers.
Overview of the OIC Program
The IRS OIC program on its face can appear very attractive to taxpayers with unpaid liabilities. 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.
Keep in mind that taxpayers do not automatically qualify for an OIC. The IRS has cautioned that, absent special circumstances, if you have the ability to fully pay your tax liability in a lump sum or via an installment agreement, an OIC will not be accepted. So in cases where a taxpayer may have absolutely no assets it would be an error to assume that such taxpayer would immediately and easily qualify. It is not widely understood that where a taxpayer has future earning potential it may preclude them from qualifying for an OIC, even if they are currently witout any assets.
The IRS may accept an offer in compromise based on three grounds:
The most important point to be aware of is that the decision whether to accept or reject an OIC is entirely within the discretion of the IRS.
Sometimes, but very rarely, an OIC will be deemed accepted because the IRS failed to reject it within 24 months of receiving the offer.
The low acceptance rate of OICs has had a lot of Congressman and watchdog groups upset. Due to taxpayer frustration and pressure from various sectors, the new streamlined OIC program was implement and is intended to cut through much of the limitations of OICs. The IRS promised, among other things, to process streamlined OICs more quickly.
In February 2011, the IRS announced some changes to streamlined OICs. Streamlined OICs may be offered to taxpayers with total household incomes of $100,000 or less and who have a total tax liability of less than $50,000. Taxpayers who do not meet these requirements may apply for a traditional OIC.
Sreamlined OIC Procedures
The streamlined procedures do not necessarily mean that the IRS will accept more OICs; merely that it will process the offers it receives more quickly. Since the streamlined OIC program is relatively new, the IRS has not yet reported how many streamlined offers it has accepted. At this point no one really knows whether these changes will result in more offers being accepted.
Before accepting or rejecting a streamlined OIC, IRS examiners must verify that the information provided by the taxpayer is correct. The IRS instructed examiners reviewing streamlined OICs to verify taxpayer information through internal research. Examiners will verify ownership of items such as real estate, motor vehicles and other property.
Examiners also will be able to communicate directly with taxpayers or their representatives. The IRS instructed examiners to contact taxpayers or their representatives by telephone whenever possible; rather than sending written notices. Three phone attempts should be made over two business days to contact the taxpayer or his/her representative. If the examiner reaches the taxpayer's voicemail, the examiners should request a call-back within two business days.
Here are the latest OIC changes:
- Revising the calculation for a taxpayer’s future income. The IRS will now look at only one year (instead of four years) of future income for offers paid in five or fewer months; and two years (instead of five years) of future income for offers paid in six to 24 months. All OICs must be paid in full within 24 months of the date the offer is accepted.
- Allowing taxpayers to repay their student loans. Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer’s post-high school education. Proof of payment must be provided.
- Allowing taxpayers to pay state and local delinquent taxes. When a taxpayer owes delinquent federal and state or local taxes, and does not have the ability to fully pay the liabilities, monthly payments to state taxing authorities may be allowed in certain circumstances.
- Expanding the Allowable Living Expense Allowance. Standard allowances incorporate average expenses for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer-in-compromise requests. The National Standard miscellaneous allowance has been expanded. Taxpayers can use the allowance to cover expenses such as credit card payments and bank fees and charges.
The streamlined OIC program have been very hard to implement. The acceptance rate for all OICs is very low. In 2010 approximately 13,000 offers were accepted. So only a select few taxpayers will make an offer that the IRS will accept. Nonetheless, the OIC program is one tool that may be used by taxpayers with unpaid liabilities. Sometimes it is worth exploring the possibilities and with these new procedures it may be more probable that a particular taxpayer may qualify.
If you have any questions about the IRS's streamlined OIC or traditional OIC, please contact our office.
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