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A Way to Potentially Lower Your Federal Income Tax Debt | Tax Tip of the Week | No. 152 June 27, 2012

Posted by bradstreetblogger in : Tax Tip, Taxes, Taxes, Uncategorized , trackback

Update on Offer in Compromise Rules

A couple of weeks ago (TTW # 150) we looked at the revised collection and installment payment rules under the IRS’s “Fresh Start” initiative.  “Fresh Start” is a new program that the IRS hopes will help taxpayers clear up their tax problems in a shorter period of time than the past.

This week we will look at the revised Offer in Compromise (OIC) rules.  An OIC is an agreement between a taxpayer and the IRS settling the taxpayer’s tax liability for less than the full amount owed. 

An OIC is generally not accepted if the IRS believes the taxpayer can pay the liability in full as a lump sum or in an installment agreement. The IRS looks at each taxpayer’s income and assets to determine whether and how much the taxpayer can pay (the IRS calls this “reasonable collection potential”). Part of this analysis involves calculating allowable living expenses, which are set using national standards, to determine average expenditures for the cost of basic necessities in similar geographic areas. The ability to pay is also determined by looking at the taxpayer’s future income. 

Under the new rules, in calculating a taxpayer’s reasonable collection potential, the IRS will now look at only one year of future income (down from four years) for Offers in Compromise that will be paid in five or fewer months, and two years of future income (down from five years) for offers paid in six to 24 months. The program will now also permit equity in income-producing assets (e.g., a machine used in manufacturing) to be excluded from the calculation of reasonable collection potential for an ongoing business. 

In addition, the IRS has narrowed the definition of “dissipated assets,” which are assets that were sold, transferred, or spent on things that are not necessary living expenses after the tax was assessed, or within six months before the tax was assessed. 

To respond to what the IRS characterizes as “real-world situations,” allowable living expenses used to determine a taxpayer’s reasonable collection potential now include credit card payments and bank fees. Allowable living expenses now also include payment of federally guaranteed student loans and payment of a certain percentage of delinquent state and local taxes.  

For more information, the IRS has updated Form 656-B  “Offer in Compromise Booklet” and Form 656.

If you think you are candidate to be considered for an OIC give us a call. 

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

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…until next week.



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