Get a “Fresh Start” with the IRS

The IRS announced another expansion of its “Fresh Start” initiative by offering more flexible terms to one of its debt reduction program (“OIC”).

The expansion focuses on the financial analysis used to determine which taxpayers qualify for an OIC. As a result, some taxpayers may resolve their tax problems in as little as two years, compared to four or five years in the past. In certain circumstances, the changes announced include:

(1) revising the calculation for the taxpayer’s future income;

(2) allowing taxpayers to repay their student loans;

(3) allowing taxpayers to pay state and local delinquent taxes; and

(4) expanding the Allowable Living Expense allowance category and amount.

In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. OICs are subject to acceptance on legal requirements.

According to the IRS, it has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations. 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, down from four years; and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted.

Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In addition, equity in income-producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses.

The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances, the IRS stated, provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests. The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.

The IRS has also clarified guidance relating to payments for loans guaranteed by the federal government for the taxpayer’s post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.

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