IRS Relaxes Rules for Tax Debt Settlement

In response to overwhelming household debt and tax liabilities, the Internal Revenue Service (IRS) recently announced it intends to aid struggling Americans by possibly reducing their tax debt.

In May 2012, the IRS altered one of its program qualifications so people drowning in tax debt could more easily benefit from the Offer in Compromise (OIC) program. OIC is an expansion of the Fresh Start program, which was originally created to help people and small businesses pay back taxes and possibly avoid tax liens.

According to the IRS, the OIC will allow certain taxpayers to negotiate and settle with the government for less than they owe if the tax debt creates a significant financial hardship. This effort, it is anticipated, will help people reduce their liability more quickly. Circumstances regarding payment negotiation will revolve around income, ability to pay, expenses and asset equity.

Paying Down Tax Debt

To be eligible, applicants have to be current with all filing and payment requirements and cannot be in the midst of an open bankruptcy proceeding. Candidates will be required to pay a nonrefundable $150 application fee and an initial tax payment, although these amounts can be later applied to the tax liability. People who meet the Low Income Certification guidelines are not required to include these payments up front nor make monthly installments during the evaluation time period.

The initial payment required will depend upon the form of payment option chosen. Those who choose to pay a lump sum will have to submit 20 percent of the total offer with the application. The remaining balance of the offer would be due within five or less payments upon written acceptance. Another option is to continue to make monthly installments while waiting for approval and if accepted, pay monthly until the debt is down to zero.

According to the IRS, a Notice of Federal Tax Lien may be filed while a person is waiting for an offer to be accepted, but all other collection activities will be suspended. During this time, the collection time is extended and the taxpayer is not required to make payments on an existing installment agreement, only the payments associated with the offer. If a determination is not made within two years of the OIC application receipt date, the offer is automatically accepted.

The intention of the revised program is to make more people eligible to eliminate tax debt as well as decrease the overall processing. In fiscal 2011, the IRS was said to only accept 34 percent of all applications, and processing typically required six months to a year. Economists say they expect the changes will especially help the middle class in need of serious debt relief.

A formula will be used to establish an amount the IRS will accept from taxpayers; however the variables have changed to make it easier on the taxpayer.

Relaxed Rules for Taxpayers

One of the most significant changes in the program is that the multiplier used to create a payoff number has been reduced. Previously the disposable income amount was multiplied by 48 or 60; now it will be multiplied by 12 or 24. For people with an ongoing business, the equity in the assets will not be included when determining total assets to disposable income.

In the past, the IRS used a set of National Standards to determine a person’s housing, household and transportation expenses. If a taxpayer had a high mortgage payment, for example, in an area with traditionally lower payments according to the National Standard, the IRS would use that lower number. The National Standard tables for housing, transportation and household expenses have been relaxed a bit as well.

Another important change within the revised program is that the agency previously did not allow unsecured debt, such as credit cards, to be considered part of the overall debt equation. Delinquent state and local income taxes as well as student loan payments were not part of the formula either, until now.

If an application is not accepted by the IRS because it considers the offer too low, a letter will be sent indicating the amount the IRS would accept. A report can be requested to explain why an offer was rejected, which may help if an applicant would like to resubmit an offer.

The IRS is not required to accept less than full payment of tax debt owed but it may be more likely to do so if there is doubt as to whether the full amount could ever be collected or there is any question in liability.

OIC program participants must agree to file on time and pay taxes for the following five years. If the OIC is revoked by the IRS, the full amount of tax liability would be reinstated along with the addition of penalties and interest.  Aggressive collection efforts would then begin.