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Offer in Compromise: How the 2012 Change in Guidelines Will Help You Settle Your IRS Debts

Alex Moretsky

An Offer in Compromise (OIC) is an agreement between you, the taxpayer, and the IRS that settles a tax debt for less than the amount owed. It offers a way to pay off your debt and get a fresh start. In 2012, the IRS changed the guidelines and liberalized the rules making it easier to afford and qualify for an OIC. That, in turn, resulted in a dramatic increase in the acceptance rate. In the last two years the number of offers accepted has risen from 24,000 to 31,000, a percentage change of 38% to 42%. This is a dramatic improvement from a decade ago when less than 25% of applications were accepted. It also represents a welcome change from an agency that has placed substantial roadblocks to those seeking to compromise their tax obligations. These changes will help some taxpayers resolve their tax problems in as little as two years compared previously to four or five years.

The financial analysis used to determine which taxpayers qualify for an OIC has also changed. It now includes:

  • Revising the calculation for the taxpayer’s future income.
  • Allowing taxpayers to repay their student loans.
  • Allowing taxpayers to pay state and local delinquent taxes.
  • Expanding the Allowable Living Expense allowance category and amount.

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 fewer months, as opposed to four years and two years of future income for offers paid in six to 24 months, down from five years.
The most recent changes also allow taxpayers larger discounts on their assets from prior rules. As an example: before the recent changes, a taxpayer’s investment account with a value of $100,000 would have required the taxpayer to fully account for that amount in their offer. Under current rules, the taxpayer can discount the value of the account by 20%, thereby reaching a valuation of $80,000. In fact, the IRS uses the concept of discounting by 20% for almost all taxpayer assets, whether tangible like real estate and vehicles, or intangible.

Before an OIC will be considered you must do all of the following:

  1. File all tax returns that are legally required through the tax year;
  2. Make all required estimated tax payments for the current year; and
  3. Make all required federal tax deposits for the current quarter if you are a business owner with employees

OIC qualifications are based on computation of a taxpayer’s ability to pay debt before the IRS runs out of time to collect (collectible statute expiration date). This decision is not subjective, but predicated on formulas.

To qualify for an OIC:

  1. You must prove you cannot pay the total balance owed before the collection statute expires
  2. There is doubt whether the IRS can collect the full amount owed from you, known as “doubt as to collectability”
  3. Alternatively, you can show that due to exceptional circumstances, payment would cause economic hardship or be unfair or inequitable

The OIC process is a formal process. It begins when you file Form 656 and pay a $186.00 fee (exempt if you are below poverty guidelines). In addition, you must send the first month’s payment with your completed application unless paying in 5 payments or 5 months, in which case you must send 20% with your application. If taking longer than 5 months to pay, you must continue to make all proposed payments while the offer is pending.
Even if you are rejected you should try again. Two reasons for rejection are your offer was too low, in which case the IRS will tell you what amount is acceptable or you are a notorious character. After finding out why you were rejected, re-submit. If the financial circumstances have not appreciably changed or the new offer is not different from the old, consider writing a letter offering more cash.