[author: Aaron Kase]
For consumers facing deep tax doo-doo, there may be a light at the end of the tunnel. The Internal Revenue Service announced earlier this year that it was liberalizing its “Offer in Compromise” program, which will make it vastly easier to reach a settlement with the government when a taxpayer is unable to pay off the entire debt.
Under the new rules, the IRS will consider Offers in Compromise that account for how much cash a person can come up with in a year or two, instead of the previous policy which demanded up to five years of income. What’s more, the feared tax agency will also take into account more of a person’s monthly expenses when calculating exactly how much he or she can afford to pay.
“The IRS was forced to recognize that many taxpayers are struggling to pay their bills,” explains Phillip M. Smith Jr., a tax attorney in California. “They started putting in common-sense type changes that reflect the realities of the current American economy. Expecting someone to have the same earning potential for 48-60 months was unrealistic because you can’t even predict if someone will be employed.”
Offers in Compromise are only an option when it appears unlikely that a taxpayer can pay off his or her entire debt, either in a lump sum or in installments. After deducting for reasonable monthly expenses, the offer must be the sum of a year’s worth of disposable income if the tax debt is to be paid off in five months or less, or the sum of two years’ worth of income if it is to be paid off between six to 24 months.
For example, a person who has $300 in income per month left over after expenses. If the person can come up with $3,600, or a year’s worth of disposable income, in five months, he could make an offer. Or alternatively, he could offer to pay $7,200, or two years’ worth of disposable income, with up to 24 months to pay it off. Under the previous rules, the same taxpayer would have had to come up with between $14,400 and $18,000 before the IRS would consider the offer.
A person’s age, health and income all come into account when the agency decides if a tax bill is payable or not.
“If you got little old ladies on retirement or fixed income, it doesn’t matter how much they owe, they’re going to qualify,” Smith says.
Kinder, Gentler IRS
Between 2007 and 2011, about one-quarter of Offers in Compromise were accepted by the IRS. “It was a no-win situation for everybody,” Smith says. “It was just bureaucrats sitting up there stamping ‘deny deny deny.’ Many people didn’t want to go through it, because it cost them a lot of money and they didn’t get anything out of it.”
“Now they have a system where they can ‘accept accept accept,’” says the attorney. “That’s the biggest change.”
Consumers who think they can make an offer should see a skilled tax attorney, a certified public accountant or an official enrolled agent qualified to represent them before the government. Beware of tax relief companies that might market themselves as qualified but are not actually authorized to prepare Offers in Compromise, especially if they are advertising across state lines.
Smith chalks up the change in philosophy behind the kinder, more gentler IRS to an acceptance of conditions on the ground. “Before it wasn’t about a fresh start,” he says. “It was about protecting the interest of the government and getting as much as they could out of taxpayers. Now that philosophy has changed. It’s helpful to the economy to give taxpayers a fresh start to rebuild their lives and start contributing to this economy.”
“They’re facing facts,” he says. “The American public doesn’t have it right now.”
Visit Lawyers.com to learn more about tax law.