The IRS Modified IRM in IR-2012-53, May 21, 2012, Fresh Start Initiative for Offers-In-Compromise - New IRS Flexibility for Offers-In-Compromise is Available

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The tax law firm of Alvin Brown & Associates clarifies the new IRS offer-in-compromise administrative changes that open the offer-in-compromise settlements to more taxpayers.

Reduced cost for an Offer in Compromise Settlement

An Offer in Compromise is an agreement between a taxpayer and the IRS that settles the taxpayer's tax liabilities for less than the full amount owed. The IRS looks at the taxpayer's "future income" plus assets to make a determination of the taxpayer's reasonable collection potential.

The IRS has recently reduced the cost of settling a tax debt by at least 75% in an Offer in Compromise for qualifying individuals. The IRS expanded its Offer in Compromise program so that many more individual taxpayers to qualify for settlement of their tax debt by expanding the base of taxpayers who qualify to settle their tax debt in an Offer in Compromise.

An Offer in Compromise settlement is generally based on objective standards that include the value of a taxpayer’s assets and calculation of “future income.” Future income 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 number of months into the future. As a general rule, the taxpayer’s current income is used in the analysis of future ability to pay.

In the calculation of “future income”, gross income is reduced by “allowable expenses” and “necessary expenses.” Generally, the allowable expenses include amounts spent for reasonable and necessary living expenses and include such things as housing, transportation, food and clothing, medical, child care, court ordered payments and similar other necessary expenses. Necessary expenses are those necessary for the production income or for the health and welfare of the taxpayer’s family.

The net number ( income less allowable and necessary expenses) was previously multiplied by 48 to calculate “future income.” Under the new IRS guidelines, the multiple is 12 rather than 48. For example, if the excess income amount is $1,000 per month, the “future income” calculation would be $12,000 rather than $48,000 under the prior guidelines. The reduction in the “future income” calculation substantially expands the base of those who can afford to settle their tax debt with the IRS. This settlement computation does not take into account the size of the taxpayer’s tax liability. In the $12,000 example, it makes no difference is the tax debt is $100,000 or $10 million. The settlement guideline only focuses on the future income computation plus the net value of the taxpayer’s assets. Many more taxpayers will be able to quality for Offer in Compromise settlements because of the greatly reduced “future income” calculation.

Another important change greatly eliminates the IRS “dissipated asset” rule. Generally, under the prior rules, assets disposed of were treated as assets still owned by the taxpayer. Under the current change, the “dissipated asset” issue can only arise if the IRS can demonstrate that the asset disposed of was made to avoid the payment of a tax liability (Example: to reduce the assets taken into account in an Offer in Compromise). The Offers in Compromise Form 433-A and Form 433-B have been revised to reflect these changes.

Other changes to the program include: allowing taxpayers to pay state and local delinquent taxes.

  •     Allowing taxpayers to repay their student loans;
  •     Expanding the "allowable living expense" allowance category and amount;
  •     Disregarding equity in income producing assets for on-going businesses.
  •     A $3,450 reduction of the equity of vehicles;
  •     Allowance of payments for loans guaranteed by the federal government for the taxpayer's post-high school education;
  •     Disregarding some bank balances needed for necessary expenses;
  •     Allowance of payments for delinquent state and local taxes allowed based on percentage basis of tax owed to the state and IRS.
  •     Disregard of bank balances needed for reasonable and necessary living expenses.

Free guidance for Offer In Compromise qualification is offered by tax attorneys at the law firm of Alvin Brown, & Associates, LLC, ab(at)irstaxattorney(dot)com or by calling (212) 588-1113

Media Contact: Alvin Brown Alvin Brown & Associates, LLC, 212-588-1113, ab(at)irstaxattorney(dot)com

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Alvin Brown
Alvin Brown & Associates, LLC.
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