The new Offer In Compromise (OIC) program offers exciting opportunities for Taxpayers in distress that did not exist under the old OIC regime. On May 21, 2012 the Internal Revenue Service (IRS) announced that it is expanding its Fresh Start program to include more favorable terms for the OIC program. Often times the OIC is promoted by unscrupulous practitioners as a way to settle a tax debt for “Pennies On The Dollar!” Unfortunately, this is not true for most Taxpayers. Historically, the IRS has accepted roughly one-third of the OIC’s submitted. However, because of the changes to the OIC program, the chances of a successful OIC have increased substantially.
The OIC is used to settle generally large tax debts for a reduced amount. Typically, an OIC is not accepted where the IRS believes that full payment can be made in a lump sum or in an installment agreement. In order to determine the settlement amount under an OIC or reasonable collection potential, the IRS follows established guidelines and procedure. In the past the reasonable collection potential generally consisted of the fair market value of the Taxpayer’s assets plus forty-eight to sixty months of disposable income. Under the new OIC rules, the Taxpayer must pay twelve months of disposable income for an OIC paid in five or fewer payments and twenty-four months of disposable income for an OIC paid in six to twenty-four months. The new OIC rules still require that the reasonable collection potential include the fair market value of the Taxpayer’s assets. Because of the reduction in the computation of disposable income in determining the reasonable collection potential, the new OIC can be used successfully by many Taxpayers where in the past the OIC would not have been an option.
Other significant changes in the computation of the Taxpayer’s disposable income in an OIC include an expansion of allowable living expenses, payments on federally guaranteed student loans, and payments of delinquent state and local taxes. Taxpayers can now use, under the miscellaneous allowance deduction, expenses for a certain percentage of credit card payments, bank fees and charges. Previously, student loan payments and delinquent state and local income taxes were not permissible as expenses in the computation of disposable income and the reasonable collection potential.
The policies of the new OIC should definitely be of great assistance to Taxpayers that face substantial federal tax debt. Taxpayers that previously did not qualify under the old OIC should reevaluate their eligibility for a compromise settlement with the IRS.