There is good news for taxpayers wanting to settle up with the Internal Revenue Service. Uncle Sam will accept a smaller lump sum payment to settle unpaid tax debts.
OIC More Affordable
Recently announced revisions to the IRS Offer in Compromise (OIC) program “make it easier for people to get their OIC accepted,” says Florida bankruptcy and tax lawyer, Larry Heinkel. “The new rules state that the monthly amount is now only multiplied by 12, not 48! This is a huge difference and makes it much more affordable for people to try to settle their tax debts and get on with their lives.”
OIC Rarely Worked in Past, Too Costly
“I have not been a fan of trying to “settle” tax debts with IRS OIC because they rarely worked in the past,” Heinkel said. “The amount that had to be offered proved to be way too much for most of my higher-earning clients, and bankruptcy could frequently be better option because bankruptcy also gets rid of other debts.”
“In order to try an OIC under the old rules, you had to offer at least the sum of (1) the equity in your assets, and (2) your monthly “ability to pay” multiplied by 48. The new guidelines, however, multiply the monthly amount by 12 rather than 48. “That’s a HUGE difference,” Heinkel said.
Monthly Income for 12 Months Instead of 48
Thus under the old rules, ignoring the asset equity component for a minute, if you could afford to pay $1000 per month, then the monthly income component of the equation would be $48,000 ($1000 x 48). “It was a rare client indeed who could come up with that amount of money,” said Heinkel.
In the examples above, the amount is reduced under the new rule from $48,000 to just $12,000. “It is much, much easier for someone to get their hands on this amount to settle a debt than the much higher amounts called for under the old program,” Heinkel said.
OIC Now Viable Option When Bankruptcy Not
The new rules have Heinkel “rethinking my negativity toward trying an OIC, especially for those people owing large civil penalties (that can never be discharged in bankruptcy) or those people who cannot file bankruptcy due to their job status (either in the financial services industry or maybe with certain government jobs involving security clearance).”
“The Offer in Compromise program is based on the premise that some taxpayers cannot pay their tax liabilities in full before the expiration of the statute of limitations on collections, but they may be willing and able to secure funds from a third party in an amount greater than IRS would otherwise expect to receive, so it may be time for IRS to “make a deal”, according to Heinkel.
How Much Can I Afford to Pay the IRS Monthly?
How much the IRS says you can afford to pay monthly is, basically, your “tax-home pay less “allowances” for various living expenses that are based on national and local “standards.” Heinkel said the “difference is the amount the taxpayer would be expected to pay each month for an installment agreement and greatly influences the second component of the amount to be offered in the OIC.”
Similar to Bankruptcy Means Test
This calculation is similar, but not identical to, completing the means test for determining disposable income in bankruptcy cases. As with the means test, the formulas used are quite complex. Getting professional advice and assistance is highly recommended for a positive outcome.
Online resources for IRS Offer in Compromise
- IRS Offer in Compromise Instructions
- IRS Form 656b Offer in Compromise
- IRS Form 433A (OIC) Collection Information Statement
- Video: How to Complete the IRS Form 656
Larry Heinkel is a lawyer in St. Petersburg, FL, with a bankruptcy and tax practice. He is the originator of www.TaxDischargeDeterminator.com, computer software to determine whether or not income tax can be discharged in bankruptcy.
by Jill Michaux, Topeka bankruptcy lawyer
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Last modified: June 4, 2013