Until recently, if you were behind in paying your taxes, you had three (3) options: pay the amount owed in full, enter into an installment agreement to pay the tax over time, or make the IRS an offer for less than the full amount. The choice generally depended on your financial circumstances. The first two were simple and the third called an OFFER IN COMPROMISE, had less than a 25% chance of being accepted. Under new guidelines recently announced by the IRS, option three has become easier for taxpayers to qualify.

Previously, "doubt as to liability" and "doubt as to collectability" were the only valid reasons for making an Offer. IRS has added two new criteria to this list: (1) economic hardship; and (2) exceptional circumstances. Examples of economic hardship include: (1) a taxpayer with limited resources who cannot earn a living due to a long-term illness, medical condition, or disability; (2) a taxpayer with a dependent having a along-term illness, that will deplete the taxpayer’s resources; and (3) where liquidating a taxpayer’s assets to pay outstanding tax bills would render the taxpayer unable to meet his or her basic living expenses. In short, the IRS will now have more flexibility in considering and individuals unique financial hardship when computing a taxpayer’s allowable expenses.

If you think you qualify to make an Offer, you will need to determine how much you must offer. You do this by submitting a financial statement on an IRS form. IRS has developed more precise rules and uniform standards for evaluating assets. You must offer an amount equal to the sum of: (1) the total amount of cash you have available; (2) the after tax value of any retirement plans from which you can cash out or borrow funds; (3) the value of your assets less any secured debts; and, (4) your net future income over a period of either 48 or 60 months.

Other recent reforms made by the IRS in this area include: (1) development of new national and local living standards for basic living expenses; (2) an independent administrative review before an Offer is finally rejected; (3) the general right to appeal a rejection; (4) suspension of collection activity while an Offer is pending, or for 30 days following a rejection or appeal; (5) waiver by the taxpayer of the running of the statute of limitation and collections; and, (6) innocent spouse protection for joint compromise agreements where one spouse complies and the other spouse defaults.

Even with IRS’ relaxed new rules; it sometimes can be hard to handle an Offer in Compromise by yourself. If you find yourself in a situation where you cannot pay your taxes, consider enlisting the help of a qualified accounting or tax professional before the tax man cometh.

This information is provided as a public service, and should not be contsrued as individual accounting or tax planning advice. For information on how these general principles apply to your situation please consult an Enrolled Agent