Beginning in February 2011, the IRS announced a series of new steps to help struggling taxpayers get a fresh start with their tax liabilities. The goal was to help individuals and small businesses meet their tax obligations. Over the past several years the IRS has announced a softening of its collection policies under its fresh start program.
The fresh start, says the IRS Commissioner, is for good people facing tough times. These changes include significantly increasing the minimum dollar threshold for liens, making it easier for taxpayers to obtain lien withdrawals, and simplifying the ability to obtain installment agreements between a taxpayer and the IRS that settles the taxpayer’s tax liabilities.
Under the second round of the fresh start initiative, announced on May 21, 2012, the IRS expanded a new streamlined offer in compromise (“OIC”) program. The OIC program covers a larger group of struggling taxpayers by offering more flexible terms in its OIC program. This new program promises to enable some of the most financially distressed taxpayers an opportunity to clear up their tax problems more quickly than in the past.
In general, 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 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 make a determination of the taxpayer’s reasonable collection potential.
In the past, the IRS strictly applied its OIC rules with respect to a taxpayer’s income and expense and valuation of assets. As a result of this strict application, most taxpayers who sought an OIC received a rejection.
Under the new OIC program, when the IRS calculates a taxpayer’s reasonable collection potential, it will consider only one year of future income for offers paid in five or fewer months, down from four years; and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid in six to 24 months of the date the OIC is accepted.
The new OIC policy should dramatically expand the number of taxpayers eligible to compromise their outstanding tax obligations. In the past, taxpayers generally had to pay the total value of all their assets plus 60 times their net monthly income after using the strict allowable expense standards. The greater flexibility of the new policy should reduce the valuation of taxpayer assets and the value of the future income component used to determine acceptable offers.
When reviewing a taxpayer’s income and expense statement, the IRS will apply allowable living expense standards to determine a taxpayer’s ability to pay. In response to criticisms, the IRS expanded the National Standard miscellaneous allowance to include additional items. Also, payments for delinquent state and local taxes may be allowed based on a percentage basis of tax owed to the state and IRS. These are another in a series of steps to help struggling taxpayers under the fresh start initiative.