The IRS has modified terms of their Offer in Compromise program to help taxpayers who struggle most with meeting their federal tax obligations during hard economic times. The Offer in Compromise program is designed to help taxpayers settle their tax debt for an amount less than they actually owe to the IRS. While Offer in Compromise sounds like an easy way out of the tax liability, it is not – the IRS would not allow such an agreement if it believes that the taxes can be paid in full, either through lump sum payment or through an installment agreement.  

Generally, the IRS will look at the taxpayer’s income and assets to determine a reasonable collection potential. In the past, the IRS looked at four years of future income for offer in Compromise agreements to be repaid in full, within 5 month or less, and they looked at five years of future income for agreements to be repaid between 6 and 24 months from the Offer acceptance date. Under the new terms, the IRS will look at only one year of future income for the former and 2 years of future income for the latter.  

Additional changes to the program involve excluding equity, income producing assets from reasonable collection potential and clarification of situations when the dissipated asset will be included into the calculations.

The National Standard miscellaneous allowance is used for determining of the Allowable Living Expense by averaging expenditures for basic necessities by a taxpayer. These calculations are used by the IRS to evaluate Installment Agreements and Offer in Compromise Agreements.

In addition, under new terms loans for taxpayer’s post-high school education that are guaranteed by the federal government may be allowed in Allowable Living Expenses. In some cases state and local tax delinquencies are allowed as well, based on percentage basis of the taxes owed to the state and the IRS.

For more information about the IRS Offer in Compromise program, read Form 656 Booklet, Offer in Compromise.

Please remember, before the IRS would even consider an Offer in Compromise, you need to make sure you are current on all your tax returns.If you do not file, the IRS will file a Substitute for Return, or SFR, on yourbehalf. SFR is used to determine the amount of taxes owed and is based on what the agency knows, such as W-2 or 1099, reports from banks and other financial institutions.However, the IRS will not consider all of the possible deductions to which youmay be entitled. As the result, the tax bill will be much higher than anticipated.

If you need to file a tax return in order to get current, you can file directly with the IRS or the tax relief experts at Federal Tax Management can help you with filing. With over 15 years of experience negotiating favorable tax resolutions for our clients, our tax attorneys know the IRS and how they work. Give us a call today! 877.237.2919.