Good News! IRS Expands Offers in Compromise!

Good News!  IRS Expands Offers in Compromise!

Courtesy:  Ronald A. Marini, JD, LLM in Taxation - 
Marini & Associates, PA - Attorneys at Law in Miami, FL
Offer in Compromise Pre-Qualifier online tool
OIC booklet

The IRS has completely revamped its offer in compromise guidelines to greatly increase the number of taxpayers who will be able to qualify. The new guidelines are announced in a news release by the IRS (IR-2012-53, May21,2012). 

The most revolutionary change is the methodology of calculating the offer amount. The amount of the offer in compromise has always been determined by the amount of the reasonable collection potential (RCP). RCP is determined by adding the net realizable value of the taxpayer's assets to his (Net Disposable Income x 12 months). 

Offer Amount = RCP = net assets + (Net Disposable Income x 12).

Net Disposable Income (NDI)* is defined as an estimate of the taxpayer's ability to pay based on an analysis of gross income, less necessary living expenses, for a specific month. 

In the past a taxpayer who wanted to pay the offer amount in 5 monthly installments would multiply his monthly NDI by 48 months to arrive at the amount.  A taxpayer who wanted to pay the offer amount over a 24 month period was required to multiply his monthly NDI by 60 months to arrive at NDI. In both cases NDI was added to the net realizable value of the taxpayer's assets to arrive at RCP, or the "offer amount". 

Under the new offer in compromise guidelines NDI will be arrived at by multiplying the monthly NDI by 12 if the offer can be paid in 5 monthly payments or less. If the taxpayer needs 24 months to pay the offer amount in full then the NDI will be determined by multiplying the monthly NDI by 24. The deferred payment option which allows payment over the life of the statute is no longer available.

Example:  A taxpayer who has $50,000 in realizable equity in assets, and monthly NDI of $2,000, will pay $74,000 [$50,000 + ($2,000 x 12 months)] if the offer amount can be paid in 5 months or less, and $98,000  [$50,000 + ($2,000 x 24 months)] if the offer will be paid over a 24 month period. This compares to offer amounts under the old guidelines of $146,000, or $170,000, respectively. The higher the monthly NDI, the greater the discrepancy.

The new guidelines also include changes to the necessary living expenses:

1. Payments on delinquent State taxes may be allowed in full or in part.
2. Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer's post-high school education (note it says nothing about loans incurred by parents to pay for their children's' tuition).
3. When the taxpayer owns a vehicle that is six years or older or has mileage of 75,000 miles or more, the IRS will allow additional operating expenses of $200 or more per vehicle.
4. The first $400 per vehicle of retired debt will not be added back to monthly available income.

Another welcome modification; the calculation of so-called "dissipated assets" has been radically altered. While the exact details are subject to numerous exceptions, and clarifications, in general assets which have been dissipated three years or more prior to the submission of the offer in compromise will not be included in the RCP. For example, if the offer is submitted in 2012, any asset dissipated prior to 2010 should not be included

* NDI is sometimes referred to as Future Income.