Post by Robert B. Teuber
The Internal Revenue Code allows the IRS to compromise unpaid tax liabilities in various circumstances. This procedure, called the Offer in Compromise, is most often used by people who are unable to pay the full amount of tax, penalties and interest owed because of their financial circumstances. The process for doing so has become more rigid over the years. However, the IRS has recently modified the way it calculates the amount that a taxpayer can afford to pay. These changes include:
- The equity in a business’ income producing assets will not be considered available to pay the tax debt if the assets are critical to business operations.
- The amount of cash held in personal bank accounts that the IRS considers available for payment will automatically be reduced by $1,000. This will leave at least $1,000 in the hands of the taxpayer for necessary living expenses.
- The equity considered available in personal vehicles will be reduced by $3,450 for up to two vehicles per household.
- Additional operating expenses may be allowed for older vehicles.
- Federal student loans and state/local tax payments may be allowed in the financial analysis.
- The projection of future income that will be available to pay a tax debt over time will now be calculated using a multiple of 12 or 24 months rather than the previous 48 or 60 months.
These and other changes reflect the most taxpayer friendly adjustments to the Offer in Compromise process in recent memory. However, not all of the changes are favorable to everyone. While new limits on the duration of payment plans should result in lower dollar compromises, it also means less flexibility in entering into extended compromise payment plans. Regardless, the changes will mean that compromises could now be more readily available to a significant number of people.