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Fresh Start program makes changes to offers in compromise

A number of prior posts on this blog have mentioned the changes implemented by the Internal Revenue Service under its "Fresh Start" program, which contains a number of measures aimed at helping people pay their tax bills. This week, the IRS has announced further modifications to Fresh Start, in particular making taxpayer-friendly improvements to the offer in compromise program.

An offer in compromise is one method a taxpayer can use to settle tax debts. Unlike an installment agreement, which requires repayment over a period of time, an OIC is a settlement for less than the total tax liability. An OIC is subject to acceptance by the IRS and taxpayers must meet certain criteria before the IRS will agree to one. In particular, the IRS examines each taxpayer's "reasonable collection potential" by comparing the tax owed to the person's assets and current and future income.

The agency also looks at a taxpayer's expenses, taking certain necessary expenses into account when determining how much money that person can put towards the tax debt. Under the Fresh Start program, the IRS has increased the list of "allowable expenses" to include items such as payments made on government-backed student loans and on credit card debt.

The IRS has also revised how it assesses a taxpayer's future income:

• If the offer amount will be paid off in six months to two years, the IRS will look ahead at two years of future income. That has been reduced from five years.

• If the offer amount will be paid off in up to five months, the IRS will look ahead at only one year of future income. That has been reduced from four years.

These changes represent an important development in the OIC program, which can be an effective way for taxpayers struggling with tax debt to settle their liabilities with the IRS. But taxpayers should know that there are nuances to OICs, such as understanding how much the IRS will accept given their reasonable collection metrics.

Source: Internal Revenue Service, "IRS Announces More Flexible Offer-in-Compromise Terms to Help a Greater Number of Struggling Taxpayers Make a Fresh Start," IR-2012-53, May 21, 2012.

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