Significant changes to offer in compromise program.

• Author: Snow, Danny

In May 2012, the IRS published new guidelines for its offer in compromise (OIC) program (IR-2012-53) as part of its expansion of the "Fresh Start" program. The Fresh Start initiative, first announced by former Commissioner Douglas Shulman in February 2011, has consisted of a series of initiatives designed to help taxpayers resolve delinquent federal tax liabilities and is a response to the current difficult economic climate.

In addition to new OIC guidelines, other changes in IRS collection processes have included easier access to installment agreements, increased thresholds for federal tax liens, and improved processes for removing liens. The new OIC guidelines, which are focused on the financial analysis used in determining a taxpayer's eligibility, should significantly increase the number of taxpayers who qualify for an OIC.

The major guideline changes included:

* Revising the calculation of the taxpayer's future income;

* Allowing taxpayers to pay student loans and delinquent state and local taxes;

* Expanding the types of allowable living expenses; and

* Narrowing the parameters for including dissipated assets in calculating future income.

Calculation of Future Income

Before the new guidelines were issued, the IRS would look at four years of future income in calculating a taxpayer's reasonable collection potential for offers that would be paid in five or fewer months. Under the new guidelines, this has been reduced to one year of future income. For offers paid in six to 24 months, the future income period has been reduced to two years, down from five years. This change in future income periods could result in a reduction of 60% to 75% in the amount required to be paid, depending on the time period in which the OIC will be settled.

Example 1: Taxpayer A has monthly income of $5,000, allowable expenses (also expanded under the new guidelines) of $4,500, and no assets of any value. If all other OIC qualifications were met and the OIC was paid within five months, A would have had to pay $24,000 ($500 x 48) under the old guidelines. The required payment amount using the new calculations would be only $6,000 ($500 x 12). Changes in Allowable Expenses

In determining a taxpayer's ability to pay, income is reduced by allowable living expenses. The calculation of allowable living expenses employs national standards that are designed to provide consistency and fairness in collection proceedings. However, in many cases, the national standards have...