It's getting easier to cut a deal with the IRS.
The IRS recently announced changes to its "offer-in-compromise" (OIC) program that should improve the chances of such an offer being accepted. Besides loosening the reins, the IRS has also revised Form 656, the form used to make a request, as well as adding related updates in the Form 656 booklet and Form 433A (OIC), which is used as a financial statement for this purpose.
According to a recent article in Forbes, more offers were accepted the last time the IRS tweaked the program two years ago. After those changes, 64,000 offers were received in 2012, and 24,000, or 38 percent, were accepted. In 2013, 74,000 offers were sent to the IRS and 31,000 were accepted, for an approval rate of 42 percent. During the prior decade, the IRS agreed to only 25 percent of the OIC offers.
Here's how it works in a nutshell. As the name implies, a taxpayer submits a request to settle an outstanding tax debt and agrees to pay a specified amount in a lump sum or through a series of installments. To qualify under the program, the taxpayer must have filed all the requisite tax returns, paid required estimated tax for the current year, and deposited payroll taxes for the current quarter if he or she is a business owner.
The IRS says an OIC is a legitimate option if you can't pay your full tax liability or doing so would create a financial hardship. It will consider all the taxpayer's particular facts and circumstances, including:
- Ability to pay.
- Asset equity.
Generally, an offer-in-compromise will be accepted only if it represents the most the IRS can expect to collect within a reasonable period of time. This assessment is based on the taxpayer's assets—including real estate, vehicles, bank accounts, and other types of property—plus anticipated future income (minus certain amounts for basic living expenses).
The latest changes in the OIC program provide greater market value discounts on assets than those that were previously allowed. For instance, Forbes says that a taxpayer with an investment account of $100,000 would have been required to account for the full amount in an offer. Under the revised rules, the taxpayer can discount the value of the financial account by 20 percent, for a reduced valuation of $80,000. The IRS will use this 20 percent discount for intangible assets, not just for tangible assets like it did in the past.
When the IRS last changed the program in 2012, it revised the calculation for the taxpayer's future income; allowed taxpayers to repay their student loans and state and local delinquent taxes; and expanded the amount of allowance living expenses, among other revisions.
If a taxpayer submits a lump sum offer (i.e., an offer payable in fewer than six installments), he or she must include with Form 656 a nonrefundable payment equal to 20 percent of the offer amount, on top of an $186 application fee. The 20 percent payment is nonrefundable—you won't get it back even if your offer is rejected (although it will be applied to your tax liability in that case).
There's an art, not a science, to structuring an OIC so that it's likely be approved by the IRS. Don't get greedy and submit a lowball offer. Become completely familiar with the latest rules in this area so you can represent your clients to the best of your ability.