On May 21, 2012, the IRS announced the expansion of the “Fresh Start” initiative by offering more flexible terms in its Offer-in-Compromise (OIC) program. The goal is to help a greater number of financially-distressed taxpayers resolve their tax problems more quickly than in the past, as well as to reduce the number of tax liens issued. The new rules will make it easier for people to qualify for installment agreements and offers in compromise (OICs).
To expand the Fresh Start program, the IRS is adjusting the financial analysis used to determine which taxpayers qualify for an OIC. This is supposed to help make it possible for some taxpayers to resolve their tax problems in as little as two years — compared to four or five years in the past. Among other changes, the IRS is revising the calculation for the taxpayer’s future income, allowing taxpayers to repay student loans and any delinquent state or local taxes. It also expands the “allowable living expense allowance” category and amount.
The IRS acknowledged the weak economy and that many taxpayers are struggling to pay their bills. These changes to the OIC program are designed to take those factors into account and better reflect real-world situations. “This phase of Fresh Start will assist some taxpayers who have faced the most financial hardship in recent years,” said IRS Commissioner, Doug Shulman. “It is part of our multiyear effort to help taxpayers who are struggling to make ends meet.”
An OIC is essentially an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Before accepting an offer, the IRS examines the taxpayer’s income and assets to determine their reasonable collection potential. Note that an OIC is generally not accepted if the agency believes the liability can be paid in full as a lump sum or through a payment agreement.
Under the new guidelines, 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 less months — this is down from the previous requirement of four years. For offers paid in six to twenty-four months, the new guidelines are based on two years of future income (instead of five years). It’s important to remember that the IRS did emphasize that OICs must be fully paid within twenty-four months of the date the offer is accepted.
Other changes to the Fresh Start program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, the IRS said that equity in income-producing assets will generally not be included in the calculation of reasonable collection potential for ongoing businesses.
The IRS further noted that the allowable living expense standards (which are used to determine a taxpayer’s ability to pay) have been expanded. Allowable living expense standards now includes items such as credit card payments and bank fees and charges, payments for student loans guaranteed by the Federal government, and payments for delinquent state and local taxes.
The Fresh Start program was launched in 2008 to help individuals and businesses pay back taxes, as well as to reduce the number of tax liens issued. In 2008, the IRS also announced tax lien relief for people trying to refinance or sell a home, and in 2009 the agency added new flexibility for taxpayers facing payment or collection problems. In 2011, the IRS made additional changes to tax lien policies and expanded the threshold for small businesses resolving tax issues through installment agreements.
In March 2012, the IRS announced an increase in the threshold for using an installment agreement (from $25,000 to $50,000) without providing a significant amount of financial information. Taxpayers who owe up to $50,000 in back taxes can now enter into a streamlined installment agreement with the IRS to stretch their payments out over a series of months or years. The maximum length for streamlined installment agreements was raised to seventy-two months (from the previous limit of sixty months). Additionally, certain taxpayers who had been unemployed for thirty days or longer, or self-employed individuals who experienced a reduction in income, were given a six-month grace period on failure-to-pay penalties when filing their 2011 tax return (as long as the tax, interest, and any other penalties are fully paid by Oct. 15, 2012).