On May 21st, the IRS announced a new initiative to their Fresh Start program that may allow more tax payers to qualify – in what they are calling ‘more flexible terms’ - for an Offer in Compromise settlement. The information published so far lacks necessary details and leaves many questions unanswered, but here are the basics the IRS has put forth so far. As this program begins to solidify and take shape, more detail is sure to follow.
According to the Form 656 Booklet – Offer in Compromise, the IRS will now qualify taxpayers on either a Lump Sum cash offer or a Periodic Payment offer. A Lump Sum cash settlement would qualify a taxpayer’s ability to pay the debt based on a future projection of monthly disposable income (income after household expenses) of 12 months plus any equity in assets; the taxpayer would have to make 5 or fewer payments over 2 years to satisfy the offer amount. The Periodic Payment option would qualify a taxpayer on 24 months of disposable income plus any equity in assets, and the taxpayer would have to make 24 total monthly payments during the offer review period and after acceptance to satisfy the offer amount.
The IRS formerly had a Long-Term Deferred option, which was essentially a Partial Payment Installment Agreement, where a taxpayer makes monthly payments over the life of the collection statute – the period of time the IRS had remaining to collect the debt – and the remaining debt and obligation to make payments expired the day the statute expired. This option is missing from the Fresh Start offer program. The IRS seems to consider this an installment agreement option at this point. The new program implies that if a taxpayer’s offer relies heavily on assets and equity valuation, then the offer may be an attractive option; however, if a taxpayer’s offer relies heavily on monthly disposable income, the IRS will more than likely take into account other factors, such as the statutes longer than 2 years, and require the taxpayer establish a type of installment plan.
Of course, whether applying the old rules or the new Fresh Start rules, the IRS would never accept an offer if a taxpayer has the ability to pay in full before the collection statute of limitations expires. The IRS has yet to publish any information outlining who exactly will not qualify for this new program other than a full pay candidate; so much of the information is speculative at this point. But one thing seems clear: the IRS is broke, needs some money immediately versus over long periods of time, and is considering a settlement for the most distressed taxpayers in today’s economy.
This article is not meant to convey a full understanding of the IRS Offer in Compromise program, only the recent changes from the limited information the IRS has published to this point. For further details on the offer program or any other tax concerns, please contact a tax professional who is current on the most recent changes to the IRS Fresh Start program.