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New Rules For OIC

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Huge Changes In Offer-in-Compromise Rules Benefit Distressed Taxpayers

The OIC program allows qualifying taxpayers to settle their tax liability in full for an amount less than the full liability owed. It has not been easy to qualify in the past, and its still not, however, recent changes in collection rules regarding OIC have drastically changed.

Such changes are to the distressed taxpayer’s benefit.

The primary components on which the administrative rules rely are computations of future income and equity in assets.

Those that may benefit from these rule changes include:

  • Business owners
  • Individuals with state tax liabilities
  • Individuals with Student Loan payments
  • Individuals that have been rejected for an OIC in the past due to future income calculations or unfavorable dissipated asset determinations.
  • Individuals with high tax liabilities and little or no assets
  • Individuals who rent their home
  • Individuals without retirement savings

Under this new Fresh Start initiative the IRS has incorporated its Streamlined Offer in Compromise process into the overall investigation of offers and has added flexibility to the financial analysis used in evaluating offers. The changes make it easier to qualify to have taxes forgiven.

The Streamlined Offer in Compromise process is much less formal and less invasive into a taxpayers life.

It does not require as much probing into the taxpayers financial circumstances and ability to pay. Even though the OIC process is based on a taxpayers ability to pay rather than based upon the amount owed by the taxpayer, the Streamlined Offer in Compromise is a great benefit to taxpayers for these reasons:

  • Less scrutiny of the taxpayer’s form 433 collection information statement
  • Fewer requests for additional financial information
  • If necessary, requests for additional information can be made and responded to by phone, not by mail
  • Greater flexibility when considering your ability to pay.

This means that the IRS has relaxed its requirement that the taxpayer pay out the maximum amount they can throughout the life of the statute of limitations.

More relaxed guidelines mean the IRS will accept legitimately structured offers for a substantially lesser amount.

The changes to financial analysis add more flexibility to the OIC process including:

  • Greater flexibility in determining the equity in assets
  • Greater flexibility in determining the allowable living expenses
  • Greatly reducing the amount of future income included in the offer
  • Decreased timeframe to complete the OIC payment process to two years

- Greater flexibility in determining the equity in assets

The greater flexibility in determining equity in assets allows the taxpayer to calculate their assets, such as their home, vehicles, and personal effects at a quicksale equal to 80% of actual fair market value.

This is great news because the less equity a taxpayer has in assets, the less money the IRS will accept to compromise a tax debt.

- Greater flexibility in determining the allowable living expenses

The IRS will allow the national and local standard for living expenses. This means that if you only spend $900 on rent, if the local IRS standard is $1,200, you can claim $1,200 as an allowable expense and the IRS will not require further substantiation of the expense. Applying this strategy across the board on all IRS allowable expenses serves to significantly lower a taxpayers disposable income, or income after all IRS allowable expenses. This too is great news, because the lower the disposable income, the less money the IRS will require in an Offer in Compromise.

- Greatly reducing the amount of future income included in the offer

Another major change is the amount of disposable future income that the IRS will consider when evaluating an Offer in Compromise. In many cases, this is the biggest and most beneficial change in the offer process. Prior to the changes, the rules allowed a calculation that included 48-60 months of disposable income. This resulted in unreasonably high offers and most people who qualified for an Offer in Compromise did not have the ability to pay because the offer amount was so high. Thus the Offer in Compromise program was a bit of an illusion.

Such is not the case now. The IRS now applies a multiplier of 12 or 24 (months of net monthly income) depending on how fast a taxpayer intends to pay the offered amount. If a taxpayer is able to pay the offered amount in a lump sum (the accepted amount is actually paid in 5 payments) then the IRS will only require 12 months of net monthly income in the offer formula. This smaller multiplier means the offer amount is 75% less than before the changes took place.

- Decreased timeframe to complete the OIC payment process to two years

Please note, we have successfully negotiated that the taxpayer be allowed three months between each of the 5 payments, which has allowed the settled amount to be paid out over 15 months after acceptance rather than six months after acceptance. This strategy allows a taxpayer a significant amount of time to secure the funds to pay their offer, not to mention that the average time it takes for the IRS to accept an Offer in compromise is 11-14 months. In essence, the lump sum settlement amount can extend out longer than 2 years, allowing time to set aside money for the settlement.

The Lump Sum Offer

The lump sum Offer requires the taxpayer to submit 20% of the offered amount at the time the offer is made (in some cases, this may be eliminated). This amount is applied towards the liability, and the taxpayer may designate which year or quarter they wish to apply these monies. This allows the taxpayer to plan for an alternative that is in his or her best interest, in the event that the IRS declines the offer.

For example, because the 20% down payment on an offer is considered a voluntary payment, the taxpayer can request that the amount be applied to the newest period of liability.

Because individual tax liabilities have a collection statute expiration date, applying the down payment to a newer period makes it that much more likely that an older portion of the unpaid liability may expire. When the IRS forces collection by levy, garnishment, or other means, the monies collected are applied in the best interest of the government, which means that the monies are applied to the oldest period of liability first, penalties and interest first.

In other words, the IRS will apply payments made by forced collection to the period most at risk of expiring. Being able to dictate where the 20% payment is applied is a great added benefit to a taxpayer making an Offer in Compromise.

Taxpayers qualifying as low-income or filing a doubt as to liability offer are not required to pay the 20 percent payment on a lump sum offer.

The Periodic Payment Offer

If a taxpayer is unable to make a lump sum offer, but can pay an offer off in 24 months or less, then the IRS requires that a multiplier of 24 be used. This means that the IRS will require the minimum offered amount to include at least 24 months of the taxpayer’s disposable income. The periodic payment can have the effect of doubling an offer amount, but should be evaluated regardless because it may only slightly raise the offer amount, yet it gives the taxpayer the ability to make the offer over a longer period of time.

A major benefit of the periodic payment offer is that the IRS does not require a 20% down payment. Rather, the offer amount is divided into equal payments and the taxpayer is required to submit monthly payments while the offer is under review. If the offer is accepted, then the payments are recalculated to allow the remaining unpaid offer to be paid over 24 months in equal payments. It is critical that a taxpayer making a periodic payment offer timely submit their monthly installments under the offer. Failure to make these payments will result in rejection of the offer.

As with the lump sum offer, a taxpayer making a periodic payment offer may designate where the payments are applied when they are making their payments, pending acceptance of the offer. Again, this allows the taxpayer to apply payments in his best interest, rather than in the best interest of the government.

Taxpayers qualifying as low-income or filing a doubt as to liability offer are not required to pay initial partial payments on a periodic short term offer.  

The Teeth Of The Offer Process

The Offer in Compromise is aptly named. It is compromise on both the taxpayer’s and the IRS behalf. The IRS compromises on the amount owed; the taxpayer “compromises” by agreeing to timely file and pay all future tax liabilities for the following 5 years after acceptance. A taxpayers failure to timely file and pay all future tax liabilities will result in the offer being nullified and the taxpayer owing the full amount of his liability, plus penalties and interest accruing during the interim. This strict provision of the Offer in Compromise program goes a long way to ensure future compliance by attaching a drastic and dreaded consequence for non-compliance.

If you have questions about the new offer in compromise rules and would like to find out if you qualify, contact Gilland Law Firm PC.

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