In the 25 year operation of Washington Tax Services, we've seen a lot of rule changes with the IRS in the Offer in Compromise program, but never a change as generous as the latest. These new rules created in the Spring of 2012 are truly a game changer and should increase the amount of people taking advantage of the OIC program.
Here is the biggest change:
Previously, Offer amounts to settle back taxes were calculated by multiplying 48 months of one's "allowable" disposable income. The new rule? 12 months. That's a 75% reduction of what you had to offer previously! Here's a direct quote from the IRS memorandum:
"When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted"
What does this mean in real terms?
I have a client who previously qualified for an Offer of $22,000 on her $60,000 debt due to the fact that according to the IRS' numbers she had about $400 of disposable income (based on IRS standards) multiplied by 48 months (adding in some assets) and she qualified for an offer of about $22,000.
With the new rule, we only have to give 12 months of disposable income: in this person's example, that's only $6,000 (including the minimal assets. That's a 75% reduction from the previous OIC rules :)
Other significant changes:
- Credit card payments, bank fees and other charges are added to what is an expanded National Standard expense for everyone.
- Years ago the IRS allowed for taxpayers who were paying their state's back taxes. About 7 years ago, these were no longer allowed in calculating one's disposable income for Offer in Compromises. Good news: they're allowed again!
These huge changes in the offer program might benefit those who are already in a payment plan with the IRS. Particularly when the balance due is very high.