The IRS Has Changed its Offer in Compromise Program
Back in 2012 the IRS gave a nickname to its Offer in Compromise Program. They wrapped it up in pretty paper and put some ribbons and a bow on it and called it their “Fresh Start Program.” It was kind of hokey but it actually was well-intentioned.
Let’s call this Offer in Compromise Fresh Start Program their “OIC” Program.
OIC are great for taxpayers who owe IRS a lot of money and can’t pay the full amount they owe. The IRS’s OIC Program allows these people to pay a lower amount and then have the entire balance due wiped clean. Gone. Zeroed out. Zip. Zilch. As in “you don’t owe us a dime now.”
The IRS Fresh Start Program
The IRS Fresh Start Program has had some pretty mixed results since it was begun but it has actually simplified the whole process. Not a whole lot, but some.
The Fresh Start Program requires all offers to be fully paid within two years (24 months) of the date the offer is accepted by IRS. This is down from the previous requirement of five years (60 months). This change can certainly relieve some stress on taxpayers by taking three years off the amount of time that IRS previously required those payments to be made. So if a married couple owed, say, $120,000 in back taxes and the IRS calculated that they could pay $287 per month then they would pay a total of $287 x 24 months = $6,888 instead of $287 x 60 months = $17,220. That’s a savings of $17,220 – $6,888 = $10,332. So you can easily see the benefit of this one small change that IRS has made to its Offer In Compromise Program.
IRS says that its changes show a 60% decrease in the total amount that has been calculated to adequately and totally settle old and unpaid tax balances that are paid within this two-year period. IRS has also reported a 75% decrease in the total amount they previously demanded to be paid by people who agreed to pay off their lower balances within just six months.
Fresh Start Program Requirements
Digging deeper into the details of this IRS Fresh Start Program for Offer In Compromise requirements….
- IRS now considers only ONE year of their calculated “future income” for taxpayers who agree to pay their lower balances within six months. Previously, IRS considered FOUR years of future income.
- IRS now considers only TWO year of their calculated “future income” for taxpayers who agree to pay their lower balances within twenty-four months. Previously, IRS considered FIVE years of future income.
- IRS also changed its allowance for what they call National Standards Expenses for such regular monthly expenses like food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous expenses. These Allowable Living Expenses are now published on the IRS website at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/National-Standards-Food-Clothing-and-Other-Items. These figures are for all taxpayers and not just self-employed individuals.
- IRS reports that “Taxpayers are allowed the total National Standards amount monthly for their family size, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the National Standards for food, housekeeping supplies, apparel and services, and personal care products and services, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses.”
- IRS has tried to closely calculate Housing and Utilities Expenses in each county of each state of the country rather than just estimating everyone in the entire country into the same monthly housing expense amount; knowing that various cities and areas in the country have higher costs of living has forced the IRS into breaking down these costs into more accurate geographical estimates. They can be found here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Local-Standards-Housing-and-Utilities
- IRS calculations of a person’s allowable monthly expenses to include student loan payments and even state income taxes that have not been fully paid.
- IRS previously wanted to increase the total payments made by delinquent taxpayers to include the entire amount of all equity in automobiles. Most people’s cars have little or no equity since the owners usually finance their car purchases and owe more on their cars than the cars are worth – so there is no equity in the auto. But many people have cars that they own free and clear of any debt or they may have autos that actually do have equity. Before IRS changed its equity requirements all taxpayers had to include in their total payments the equity value of their automobiles. Now, though, taxpayers are permitted to exclude up to $3,450 of the equity value of their automobiles. This change has helped a lot of people out since it was first implemented in 2012.
- IRS also previously added all available cash in bank accounts to the total payments that taxpayers were required to pay. For example, if a taxpayer had $1,000 in her bank accounts when she filed her Offer in Compromise in 2011 she would have been required to include it in the total amount of her payments over the next 48 months. This would have calculated to $1,000/48 months = $21 added to each monthly payment over the entire four years (48 months) of payments. Since this change was made in 2012 the IRS now does not include up to $1,000 in cash when they calculate her monthly payment requirement. It may seem like much since it is only $21 but this change still helps her out a bit.
- IRS also now completely excludes the estimated value of a small business owner’s assets that are used in the business. For example, let’s consider a couple that owns and operates a print shop and they own equipment like printing presses and shelving and calculators and computers and phones and counters and security equipment and other assets valued at, say, $45,000; and let’s also say that they owe $21,000 against that equipment. This leaves the couple with total business property equity of $45,000 – $21,000 = $24,000. So previously this $25,000 had to be included in the couple’s monthly OIC payment and that would compute to $24,000/48 months = $500 per month that is now NOT required to be paid to IRS. So you can easily see that self-employed small business owners get a really good tax break so that they can continue to run their businesses and make a living and actually pay MORE income taxes in the future.
These are just a few of the changes to the IRS Offer in Compromise Fresh Start Program. Just these changes alone can save delinquent taxpayers thousands of dollars over the course of their required monthly payment programs. Prior to the changes IRS reported that it was accepting about 38% to 40% of all Offers submitted to it. Now, however, acceptance rates are reaching between 45% and 50%.
Submitting an Offer in Compromise
Submitting an Offer in Compromise to the IRS and navigating it through the IRS minefield is still difficult and could easily require professional assistance but it truly CAN be done without paying someone to help you. Our advice is to do your homework and thoroughly and exhaustively research the IRS Fresh Start Offer in Compromise program and process and educate yourself until you are totally familiar with the program and its concepts and terminology and calculations and charts and income and expense limitations and allowances.
Don’t Go it Alone
However, if you decide that you do not want to do this work yourself then you seek out a professional who is completely familiar with the IRS Offer in Compromise Fresh Start Program and who actually specializes in this field. It is easy to understand that there are many different types of doctors or mechanics or lawyers or carpenters that all have their own areas of specialization. Similarly, there are many types of tax professionals who specialize in estate taxes or trust taxes or personal income taxes or payroll taxes or income tax examinations and audits; and there is a VERY limited number of IRS Offer in Compromise professionals since this is a HIGHLY specialized field that is limited to a very small number of people in the country who need this kind of help. So think seriously about not using an inexperienced tax professional who has no knowledge of the program.
Remember the old saying that you get what you pay for. So if you want a really good result in your tax matters then make sure you make a good choice.