Brunoro Law Blog

Saturday, May 13, 2017

What is an Offer in Compromise?

Being saddled with a significant tax debt is a pretty stressful situation to be in.  For some, the IRS concept of offers in compromise, which emerged in 2012 with the Fresh Start program, is a lifeline to better financial health. With an offer in compromise, the IRS is able to compromise tax debt more easily with taxpayers who struggle to pay what they owe.  There are some drawbacks though, so if you are having trouble paying your tax debt, consider talking to an offer in compromise lawyer before you talk to the IRS.

Reducing Your Tax Debt

The rule, known as IRC 7122, allows the IRS to settle tax debts with an offer of compromise that is less than the debt owed by the taxpayer. However, how willing the IRS traditionally acts towards offers in compromise fluctuated since the rule came into existence. Typically, the IRS accepted around 40% of the offers in compromise they were proposed yearly between 2012-2014. In comparison, this figure dipped into the 25% range at times in the years preceding the 2012 Fresh Start initiative.

Qualifying for an Offer In Compromise

Offers in compromise, also known as OICs, are only permitted when the IRS feels the tax debt exceeds what the tax payer can afford as either a lump sum or through payments. To make the determination for an OIC, the IRS analyzes the taxpayer’s income and assets and decides on that taxpayer’s “reasonable collection potential.” The “reasonable collection potential” is the research the IRS conducts regarding the taxpayer assesses the taxpayer’s potential to pay the debt using both the taxpayer’s assets and income, and through this equation the IRS decides if the taxpayer can pay in the future.

More Taxpayers Are Turning to Offers In Compromise

The number of admitted OIC increased after the 2012 Fresh Start initiative, for a number of reasons. First, the calculation to determine the taxpayer’s ability to pay was revised from four years to one year if the taxpayer repays in five installments or less. If the taxpayer repays the debt in six to twenty-four installments, then two years of potential future income is now considered instead of five years.  Regardless of the repayment option agreed upon by the IRS and the taxpayer, all OIC offers need to be paid within two years.

Next, taxpayers are now allowed to include the repayment of their student loans as part of their budget. The Allowable Living Expenses the taxpayer would need was also revised in favor of the taxpayer. Now the higher cost of living expected in some states, like Hawaii and New York City, is factored into the equation, whereas previously the IRS imposed the same standard of living expectations nationwide. Furthermore, taxpayers are allowed to have credit card payments, bank fee payments, and other loan payments factored into the taxpayer’s Allowable Living Expenses, whereas previously the IRS did not consider these expenses.

The taxpayer’s bank accounts, asset property, and vehicle equity also are no longer considered in full as part of his or her assets. For motor vehicle equity, taxpayers can now exclude $3,450 from their repayment plan for vehicles that are used for family or commuting purposes. Bank account allowances allow taxpayers to exclude $1,000 from their expenses alongside removing typical monthly allowable expenses. Those owning small businesses are typically allowed to also exclude the cash potential of assets that generate income.

If you are having difficulty meeting your tax burden, contact the experienced tax lawyers at Brunoro Law today.


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