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Liberalization of Offer in IRS Compromise Program

Enforcement action by the IRS is a pendulum…going from tough to easy to tough to easy again;  at this time it appears they may be easing.  Nowhere is this better shown than the IRS has expanded its “Fresh Start” initiative by offering more flexible terms in its Offer in Compromise (OIC) program..

When the IRS calculates a Taxpayer’s reasonable collection potential (RCP), it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid within 24 months of the date the offer is accepted.

The allowable living expenses have also been expanded: Taxpayers can now include credit card payments and bank fees and charges.  Student loans guaranteed by the federal government will be allowed.  In addition, payments for delinquent state taxes will be allowed based on a percentage basis owed to the state and the IRS.

The IRS has also narrowed when a dissipated will be included in the calculation of reasonable collection potential.  The Government is concerned about the challenges businesses face in a slow economy.  To enhance the employment rate, equity in income producing assets will not be included in the calculation of reasonable collection potential for on-going businesses.

There are risks in submitting an Offer in compromise:  first and foremost they keep the money if the Offer is rejected.  Submitting an OIC also tolls the bankruptcy and the collection statute.  There is certainty of resolution of the tax problem with a bankruptcy;  there is uncertainty of outcome with an OIC.  However with non-dischargeable taxes such as trust fund taxes and SFR assessments, the new liberalization of the Offer in Compromise program offers a welcome and much needed window of opportunity for taxpayers to get closure on their tax problems.


Dana M. Ronald

Tax Crisis Institute

May 25. 2012